Anyone got thoughts on the dropping oil price?
It looks like it's down about 20% from a couple of months ago. This should mean more profitability but also gives other airlines scope to reduce prices.
Based on the latest fuel hedging report (
https://www.nzx.com/companies/AIR/announcements/256764), fuel costs should be down about $74M for H1 FY2015 (very rough estimate 3.7M barrels @$20 saving), but hedging costs are up a lot, costing about $40M for the half year (but reducing in the future as hedging position changes).
So from this rough estimate, profit will be up by a few million, but that relies on revenue holding steady. I think that's pretty unlikely if other airlines get into price cutting. Reduced fuel costs provide a lot of scope for competitors to cut prices by maybe 5%. Fuel is a very significant cost for airlines and low-cost airlines will benefit more than full-service ones.
The airline business is fairly competitive so I would expect prices to be cut once oil prices stabilise at a new level, leaving minimal opportunity to extract higher profits in medium term.
Thoughts?