Airline Executives Talk About Oil and the Economy

And you thought I was done with my Phoenix Aviation Symposium posts? Nope, but this is almost the last one, I promise. I say almost, because my review of the big executive panel is long enough that I think it’s worth breaking down into two posts to avoid making your head spin. You can find part two back here on Monday. Let’s get started with part one.

This year’s executive panel was expertly moderated by FAA Administrator-designee Randy Babbit, and it had four participants. Ali Al Rais, EVP Commercial for Qatar Airways, was there to give the perspective of an airline that is still in growth mode, as are most carriers in the Middle East. Then we had Dave Barger, CEO of JetBlue (see my interview part 1 and part 2) playing the part of the spunky upstart carrier that is settling down and (re)building infrastructure. Third, we found US Airways President Scott Kirby trying to be the rational perspective of the legacy carriers. And last we had Christoph Mueller, Aviation Director for TUI Travel, one of the largest charter carrier conglomerates in Europe.

I found Christoph to have a fascinating and blunt perspective on things, including the price of oil. “I believe the fuel price is too low, it’s artificially too low and we should anticipate it going in a different direction if we want to prepare for a sustainable industry.” He also called for airlines to be more conservative and build bigger reserves in order to prepare for the inevitable down cycles that are always experienced. Sounds far too rational for this industry . . . .

Dave, not to be outdone, was happy to be blunt as well when it came to oil. “We’ve had this drunken sailor syndrome. When everything’s fine we’re buying airplanes. I’d like to see [oil] go up because it will help stabilize air travel in this country.”

Scott was quick to jump off the love fest for higher oil prices before Dave could even finish. “I hope it doesn’t go up,” he said with a laugh. But he did admit that some good things came out of last summer’s high oil prices.

Without making the judgment of whether it will go up or not, there is a natural hedge between oil price and actual revenue. It will impose more discipline on industry capacity. None of us would say here’s an airplane that makes sense at $60 a barrel but not at $100. We wouldn’t go out and place that order. One of the benefits from last year is it will create a more disciplined mindset. We are as much at risk of oil prices going down as they are going up. It sounds like it’s reducing your risk to hedge but it can increase your risk.

Scott said that US Airways was no longer hedging, as did Dave, but Christoph said TUI was still continuing the practice.

When the discussion turned to the economy, there were disagreements. Ali felt that this would be a short-lived bust cycle, and he already saw more opportunity in places like Africa. But Christoph, again preaching conservatism, said that the US airlines were the ones that handled this the best because they saw it early (”We’re all gonna die”) and reacted quickly. Now they’re in the best shape while Asian carriers have serious trouble ahead after denying that this was happening for so long.

And the US airlines continued to preach doom. Dave said he thought there was still too much capacity out there and Scott felt the same. They both wanted to see fares increase to sustainable levels, and that’s clearly not happening right now.

Monday, I’ll cover their thoughts on foreign ownership, unbundling, partnerships, and consolidation.