Airlines Fear Declining Fares as Competition Grows Stronger
Will major airlines flounder in the face of overcapacity? Driven by a Middle Eastern buying spree, airlines are buying more planes than ever, but economic and political uncertainty is keeping passengers on the ground. In the competitive air transportation industry, which companies will be able to weather the turbulence, and will any major carriers crash and burn?
Ryanair is the First to Feel the Effects of Increased Competition
Ryanair became the first casualty as route wars led to a third quarter drop of more than 8 percent. Profits for the period between October and December, normally one of the busiest travel seasons of the year, fell by more than 8 million euros, even as the number of passengers grew by 16 percent. Due to a number of competitors adding routes and lowering fares, Ryanair was forced to slash ticket prices to attract passengers into seats.
Brexit Takes a Bite Out of Ticket Sales
Because Ryanair is based in the U.K., the company was also affected by the public’s reluctance to spend money on luxuries such as vacation travel, especially with the pound spending several months at a historic low after the Brexit vote announcing that the country would leave the European Union. This made foreign travel prohibitively expensive for many families who would otherwise take a winter holiday to warmer destinations.
Terrorism Causes Travelers to Cancel Vacations
Some travelers also cited fears of terrorism as a key factor in choosing “staycations” over going abroad. In March 2016 31 people were killed in attacks on the Brussels airport and a nearby subway station. This attack also served as a reminder of the two attacks in Paris, a major vacation destination, in 2015.
UAE National Airline Fights Dirty to Beat U.S. Rivals
Ryanair is not the only airlines facing declining profits. Emirates, the national UAE airline, has ordered several large passenger jets from Airbus and Boeing. However, Middle Eastern business travel has been sharply reduced as the oil industry took hits due to an oversupply. Although OPEC has now taken steps to shore up oil prices, it could be months before prices go up enough to spark a rise in commercial travel. In terms of oil, airlines face a double edged sword. Higher prices lead to more business class ticket sales, which offer higher profit margins. Unfortunately, higher oil prices also translate into higher fuel costs and therefore lower profit margins for the airlines.
In the interim, Emirates is competing by lowering fares and taking on new routes in the United States, in a direct violation of the Open Skies agreement. Several U.S. airlines have asked the Trump administration to weigh in on the legality of Emirates offering a nonstop flight from Athens, Greece to New Jersey. The hope is that the protectionist President will try to renegotiate the treaty, which threatens profits of carriers like American Airlines, United Airlines, and Delta.
Iran Air Could Face Losses Due to Trump Sanctions
President Trump’s policy changes could affect more airlines besides Emirates. Iran Air, Iran’s national carrier could face a delayed or cancelled sale of 80 passenger jets from U.S. manufacturer Boeing. Iran has just had sanctions imposed for the first time since the enactment of a nuclear arms treaty in 2016, following a ballistic missile test in January. While the sanctions did not directly affect the record deal valued at $16 billion, the conditions could make financing the planes difficult.
Additionally, Iranian President Hassan Rouhani conducted a second missile test the day after the U.S. announced sanctions. This could lead to Boeing losing permission to complete the sale to Iran Air. Boeing expects the sale to provide jobs for approximately 100,000 people.
Personal Electronic Devices Hurt Airline Profits
New technologies are also cutting into airline profits. Many airlines are removing in-flight entertainment devices, and choosing to offer streaming via Wi-Fi to passengers’ phones, laptops, and tablets. The devices are subject to incredible amounts of wear and tear. Also, adding hundreds of these devices to each plane increases weight, and therefore adds to fuel costs. Still, entertainment was one way airlines provided a value added service at minimal extra cost to the passenger.
How Lower Airline Profits Affect Trading
Boeing has a mixed outlook, as several airlines around the world have already placed orders for the upcoming year. However, if the Iran Air sale does not go through, the company’s share price will fall. Look for the stock to go up, unless there is a major political crisis between the U.S. and Iran. American, United, and Delta, which compete with the Emirates airline, will see lower share prices. More flights means an increased demand for oil, which should keep prices trading in the mid to high $50 range.