Financiers Urge Airlines Not to Squander Oil Price Windfall

Airlines enjoying a $100 billion windfall from lower oil prices this year are being urged not to let up on cost controls which helped them survive the recent oil price boom.

 

Gerry Laderman, treasurer at United Continental Holdings , said that if oil prices stayed low, airlines could find themselves generating more cash than they expected.

 

"For us, we have a goal of certain gross debt targets, and as treasurer I would vote for taking some of that cash and accelerate the timing to get down to those levels," he said at an Airline Economics conference.

 

Oil prices have dropped by over 50 percent in the last six months, driving up airlines' share prices

 

Aircraft financiers and industry analysts meeting in Dublin this week said the airlines should spend cash saved by lower oil on improving their cabin products, reducing debt or raising dividends.

 

But they warned that for some the financial cushion from cheaper oil could delay strategic decisions affecting further consolidation or lead to a breakdown in capacity discipline.

 

"It's fool's gold," former Air Malta CEO Peter Davies said of the cash freed up by lower fuel prices.

 

"Most airlines will treat it responsibly and take advantage of the substantial reduction in their cost ... but some airlines will see that as 'let's carry on as we are because now we can make ourselves seem profitable'".

 

Low oil prices have bought time for those struggling to survive but could just delay the inevitable, delegates said.

 

In Europe, airlines are also expected to get a boost if the European central bank goes ahead with a large-scale quantitative easing programme to inject more money into the euro zone's economy.

 

"Has (oil) given some undisciplined airlines some lease of life? The answer is yes," said Aengus Kelly, chief executive of aircraft leasing giant AerCap.

 

"And QE is doing the same thing. What the airlines really want is labour market reform in Europe, so that you can match your business model to the demand you see out there."

 

The risk to vulnerable airlines came into focus this month when state-owned Cyprus Airways was shut down after being ordered to pay back over 65 million euros in state aid.

 

"If some airlines are on the margins of collapse, another like Cyprus could hang on with oil at $50," Jonathan Wober, a financial analyst at CAPA-Centre for Aviation, said.

 

Howard Miller, former finance director of Ryanair, said past oil price drops showed there would be other demands for struggling airlines, such as requests for higher pay.

 

"The history is they'll have a little bit of respite and do what they've done previously."