As Oil Prices Fall, New Aircraft Lose Competitive Edge

The decline in jet fuel prices could stymie the airline industry’s march toward a new generation of narrow-body aircraft.

Aircraft manufacturers developed new planes and engines, and airlines ordered them, to reduce fuel consumption at a time when oil prices seemed stuck at historic highs. Now, as airlines wait to receive their new 737 MAXs, Airbus neos, and other efficient and innovative aircraft, fuel prices have dropped. According to an Oliver Wyman analysis, jet fuel prices at $2.40 a gallon or less would make older aircraft increasingly competitive with new planes, depending on the airline’s business model. And fuel prices already crossed that threshold this year.

Further, this could tempt airlines in North America to add more capacity, after several years of strict capacity discipline allowed the industry to post strong profits. Low fuel prices could spur airlines to keep their current planes in operation while adding new fixed orders of airplanes to their fleets. Considering current profitability of airlines, investors might even seize this opportunity to start new airlines with older aircraft.

While that might be a rational decision for individual carriers, for the industry, more capacity could bring the North American airline industry back to earth. North American airlines have recently achieved their best margins in a decade and seem to have finally lifted themselves out of a boom-and-bust cycle. Industry yield has grown steadily since 2002. A flood of capacity could unravel those gains.

As Oil Prices Fall, New Aircraft Lose Competitive Edge