Summary
Jet fuel is one of the top 3 cost items for airlines. Since the summer of 2008, the price of oil has declined from $140 barrel to under $40 a barrel today. This should be very good news for investors in airline stocks, as it should directly flow to the bottom line if airline ticket prices hold steady. Likewise, cruise lines' profitability is closely tied to this volatile commodity and the major players in the cruise industry could benefit from the continued decline in pricing. But right now, what we face is a need to stimulate travel, which is normally done through price reductions. Will these suppliers pass on the cost reductions to consumers?
Analysis
The Airline Reporting Corporation reported in November that the average domestic airline ticket price fell 5% month over month to $327.34. International ticket prices were down 8% to $767.94 month over month from October's rates. So we are seeing some relief on the consumer level, but perhaps not at the rate that the general public would like to see. (December and year end numbers should be published this week.)
After all, at the gas pump, during that same timeframe, we saw gas prices fall by nearly a third.
One of the arguments you will hear from the airlines is regarding "hedging" of the fuel purchases and that they couldn't do price adjustments that were commensurate with the decline in oil prices.
For the most part on the airline side of the equation, the fuel hedges for the majors expired in 2008, so any further price reduction should (theoretically at least) fall directly to the bottom line.
On the cruise line side, Carnival does not have fuel hedges in place, so they should see substantial bottom line benefit to the continued slide in oil prices. Carnival operates over 55% of the global fleet of cruise ships across all brands.
Royal Caribbean has just 24% of the global fleet and does have fuel hedges in place for 40-60% of their fuel. This can actually work against them.
Cruise lines should be enjoying the busiest and best time of the year (known as the Wave season), but it would appear that they have hit the panic button on pricing and are slashing the cost of cruising. One analyst even commented that cruising is cheaper than staying home!
The economy needs stimulation. On that subject everyone agrees.
Travel is one of the largest industries in our country, with well over a trillion in economic impact on revenues of $740b.
Lower fuel prices are good for the industry, but without lower prices for consumers, it is tough to stimulate the travel economy until the general economy begins to see recovery.
It is a tough balance, particularly for US airlines that have been losing money for more than a decade, deciding whether to bolster profitability and share price, or to go for the long term growth of the industry as a whole by sharing cost reductions with the consumer.
The cruise industry has already cast their vote with prices as low as $299 for a 7 day cruise to the Caribbean out of Florida. Brutal impact on the bottom line during a quarter that should be their best.
As always, stay tuned.
Chicke Fitzgerald
