Lower Demand and Higher Oil Prices Lead to Fall Capacity Cuts

It’s been a good run for the last few months hasn’t it? I mean, the rest of the economy has self-destructed, but airlines were able to hold on to half-decent results thanks to the preparations made when oil spiked late last year. But as they say, the party’s over. It’s time to cut once again.

We learned last year that oil prices and demand move together. So when demand started to drop off, oil prices did as well. That gave the airlines reduced costs just as revenues were falling off. But now we’ve got a real problem. Oil and demand are moving in opposite directions and not in a good way.

Demand continues to be weak. Southwest, for example, says that June isn’t looking good. And this is summer. You would have hoped that June might show some signs of life, but so far we’re not seeing it.

Yet while this is happening, oil is spiking once again. Jet fuel is around $75 a barrel these days, and that’s up more than 20 percent over a month ago. It’s also double the bottom that we saw after the bubble burst last year.

So what are airlines doing? Well they’re preparing for the worst by announcing further capacity cuts starting this fall. Delta is cutting capacity 10 percent, and American will be cutting as well. I imagine we’ll hear similar announcements from others as the nightmare scenario of higher oil prices and low demand continues to unfold.