‘Perfect storm’ for airlines facing strong U.S. dollar and high oil prices -Breaking
© Reuters. FILEPHOTO: The final approach of a passenger plane to Heathrow Airport (London, England) on September 25th 2018, is captured by a photographer. REUTERS/Toby Melville
By Jamie Freed
DOHA (Reuters) – Global airlines face a double whammy due to the unusual combination of a strong U.S. currency and high oil price at a moment when wide inflationary pressures, worker shortages and broad inflationary pressures all put pressure on recovery in the pandemic-hit sector.
As the oil price and U.S. dollars have an inverse relationship, when one is higher, the other falls. This helps airlines to manage their financial exposure in currencies other than the US dollar.
This correlation however has fallen apart in the recent months, with oil prices rising at a time in which the United States is an oil exporter net and the dollar getting a boost from the interest rate increases designed to reduce inflation.
At the International Air Transport Association’s annual meeting, Doha, this week, airlines expressed concerns about rising oil prices and the U.S. dollars.
It isn’t good for airlines. “It is the perfect storm,” Tony Webber (ex-chief economist, Qantas Airways Australia) said.
Since 2006, the U.S. trade-weighted real currency index has reached a new record. Its benchmark price is about $115 per barrel.
The dollar exposure of non-US airlines includes oil prices, plane purchase and leasing costs, maintenance costs, and debt. These all increase in dollar when the dollar becomes stronger.
Walter Cho, Chief Executive of Korean Air Lines Co Ltd, said that the U.S. Dollar, which traded at its highest against the won for more than 10 years, was “painful”, buying fuel and buying everything.
“We have U.S. Dollar debt, and have to pay interest. On the fringes of a Doha airline industry meeting, he stated that although interest rates are low at the exchange rate, it may as well be 10%.”
Most non-U.S. airlines find that the cost of rising prices is far greater than the benefits from selling tickets to U.S. customers who convert to local currencies.
SpiceJet, an Indian low-cost airline, warned last week that it will need to raise fares 10%-15% due to rising fuel costs and depreciation.
Malaysia Airlines CEO Izham Ismail claimed that while fuel has traditionally accounted for 20% of the airline’s costs, it now accounts for 45%. This is partly because of Malaysia Airlines’ weak ringgit.
Webber explained that the majority of U.S. airline companies are unhedged. They want a low price for oil, but prefer a weaker currency because it offers a better conversion rate to sell tickets in euros and foreign currencies to customers.
Peter Ingram, Chief Executive of Hawaiian Airlines, stated that the airline had been watching the yen as it traded at 20-year lows. This was in order to increase flights to Japan which is traditionally Hawaii’s largest foreign tourist market.
He said that although it’s not a binding constraint on the demand at the moment, “it’s something we’re certain of because the vast majority traffic on our flights plus or minus 90 percent is Japanese-originating traffic.” The exchange rate will increase the price of traveling to the United States.
Data from IBA, an aviation consulting firm, shows that airline failures are more common when the index that measures oil price and U.S. Dollar strength is high.
Stuart Hatcher, IBA chief economist, said last month in a webinar how strong pent up demand has meant that this year there were few failures. But the situation could change when the peak summer seasons are over.