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How oil prices are affecting Europe’s airlines

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The recent fall in oil prices is not such great news

Airlines in Europe will feel the full benefits of lower oil prices only next year, Reuters reports, while third-quarter results from Lufthansa and Air France-KLM will be hit by damage from recent strikes.

The recent fall in oil prices to US$85 a barrel and below is good news after years of high fuel costs, but hedging strategies and currency effects are softening its impact. Some insiders say a new era of falling yields could be on the cards.

“The falling oil price will hardly bring any relief for Lufthansa this year, because it has strongly hedged its purchases,” industry analyst Jochen Rothenbacher said.

Other experts estimate fuel costs could be just 6-8% lower for European airlines in 2015. The fall of the euro against the dollar means that airlines in Europe, which have many dollar-related costs, will see less benefit than US airlines.

“The question is not the oil price, but what the euro cost of fuel is,” analyst Stephen Furlong explains.

Jet fuel cargo prices in Europe have fallen 19% since their peak. But the euro has lost 7% over the same period.

“With the combination of oil and currency moves right now, we are seeing an increase in the relative competitiveness of US and dollar-linked airlines compared to European ones,” the financial director of a European airline told Reuters.

Norwegian is an interesting case as it has only 23% of its expected fuel consumption hedged for the coming 12 months, compared to around 65-85% for major carriers. That means it can quickly take advantage of lower fuel prices.

But the NOK21 million gain from lower fuel prices reported in its third-quarter results last week were by far outweighed by negative currency movements wiping NOK129 million off its balance sheet.

Reuters

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