Tuesday, March 31, 2020

No Cheap Fuel Bonanza for Airlines

Posted by January 28, 2016

While airlines are in no rush to pass on fuel savings to passengers brought by the collapse in oil prices, the Houston travel market has left them little choice.

Airlines serving the U.S. oil capital have resorted to steep discounts to lure newly budget-conscious energy executives back into the air, according to an analysis of ticket prices provided exclusively to Reuters.

Crude's 70-percent drop in the past 19 months has made the Houston travel market a rare point of downward pressure on airline revenues. Its value, including flights, conventions and related services, was estimated at $2.8 billion in 2014 in a report for the Texas governor's office.

The ticket data offers more detail than carriers have disclosed about the challenges they face at Houston's George Bush Intercontinental Airport, the ninth busiest globally by take-offs and landings, according to Airports Council International's 2014 ranking.

On average, round-trip business and first class tickets to London sold in September 2015 were 14 percent cheaper than a year earlier, at about $4,600, according to the latest figures from fare clearinghouse Airlines Reporting Corporation.

Tickets to Calgary, a gateway to northwestern Canada's vast oil fields, plummeted 59 percent to $1,020.

And prices for tickets to top drilling gateways Lagos, Dubai and Scotland's Aberdeen fell 22 percent, 23 percent and 31 percent, respectively. (Graphic: http://tmsnrt.rs/1VsEfUg)

"It's a combination of fewer people traveling and not as many people flying business class," said Gary Pearce, chief commercial officer for travel management company ATPI's energy and shipping unit.

"Companies are re-negotiating terms with anybody that provides a service to them," he added, such as asking airlines to sell lower fares or waive clauses on minimum bookings.

Exxon Mobil Corp, ConocoPhillips (COP) and BP PLC, which has its U.S. headquarters in Houston, declined to comment for this story.


The oil slide has largely helped U.S. airlines, reducing one of their biggest expenses and adding hundreds of millions of dollars to their bottom lines.

However, they have forfeited a large chunk of the gain because of fuel hedges they bought as protection against crude rising. Houston's example is another reminder that cheap oil cuts more than one way.

United Continental Holdings Inc said last week that it doubled its adjusted fourth-quarter profit to $934 million from a year ago. But slack business in Houston will reduce its passenger revenue as a portion of flight capacity by 1 percent in the first quarter, the airline said.

Chicago-based United is the most affected because it schedules more than 80 percent of Bush Intercontinental's flights. About 10 percent of United's flight capacity originated from Houston according to this week's schedules, aviation data and analytics company OAG said.

Other airlines adjusting to the oil slump include Delta Air Lines Inc, which recently stopped flights from its Minneapolis hub to Dickinson, North Dakota, near the Bakken shale oil formation.

Alaska Air Group Inc reported on an investor call last week that its energy-related sales were "fairly stable" because roughly the same number of workers needed to fly to oil-rich Prudhoe Bay to operate drills and pipelines there, despite lower production.

Airlines Reporting Corporation, owned by a group of North American airlines, declined to provide data on Prudhoe Bay flights and other routes that were dominated by a single carrier and therefore market sensitive.


Cheap oil has not only lowered corporate travel spending. Greater Houston's 6.5 million residents are cutting back on leisure trips, too.

The average low leisure fare is down 25 percent from Houston while only down 20 percent overall in the United States, according to a mid-January analysis of the top domestic routes by Harrell Associates, shared with Reuters.

Fares have fallen nationwide, not just in Houston, because lower fuel costs have let the largest airlines chop their fares in stiff competition with budget rivals like Spirit Airlines Inc

Still, the lowest refundable last-minute fares from Houston are down 11 percent, but up 5 percent nationwide, Harrell Associates data showed.

United said last week it is scrapping plans to grow its Houston operation by 2 percent in 2016 and keeping capacity steady instead.

The airline declined additional comment for this story but noted that in January 2015 it shrunk its Houston-Calgary operation to three flights per day from four.

The airline's loss could be a gain for budget rival Southwest Airlines Co, which in October started its first international flights to Latin America from nearby Houston Hobby Airport.

Reporting By Jeffrey Dastin

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