Falling oil prices means good news for all but Russian airline profitability

Even the most optimistic projections for airline profitability in 2014 seem to be exceeded as the price of crude oil continues to fall. This year oil futures figures have virtually halved and the price of a barrel of crude oil dropped below US$50.00 this week. In June it was projected that globally, airlines would make a combined net profit of US$18 billion, this figure has now been revised upwards to $19.9bn and is expected to reach US$25bn for 2015.
Based on per passenger figures, airlines should make a net profit of US$7.08 in 2015, up from US$6.02 earned this year and more than double the US$3.38 earned per passenger in 2013. Because the airline industry is so incredibly competitive and flight prices so critical, response to a change in oil prices is reflected almost instantaneously in air fares. As a consequence, domestic flights are expected to fall by some 5.1% in 2015, while cargo and freight costs are expected to fall by 5.8%.
“The industry outlook is improving. The global economy continues to recover and the fall in oil prices should strengthen the upturn next year. While we see airlines making US$25bn in 2015, it is important to remember that this is still just a 3.2% net profit margin. The industry story is largely positive, but there are a number of risks in today's global environment—political unrest, conflicts, and some weak regional economies- among them. And a 3.2% net profit margin does not leave much room for a deterioration in the external environment before profits are hit,” IATA's Director General and CEO, Tony Tyler has stated.
However the news is not good for Russian airlines for a number of reasons. Firstly the value of the ruble is collapsing as much of Russia's economy depends on revenue from oil – at the end of the 2014 the value of the ruble had fallen by 40%. The knock-on effect means fewer Russians are now travelling on the more popular routes, so despite lower fuel costs, this is negated by lack of ticket sales. While other airlines have reduced their prices, Russian airlines have increased fares twice last year, seeing an increase of 10%.
Russian airlines have substantial costs in foreign currency — predominantly aircraft leases — which have risen proportionately to the collapse of the ruble. According to Deutsche Bank, Aeroflot earns 90% of its income in rubles, while 60% of its outgoings are in foreign currencies. “The situation is very serious,” Oleg Panteleyev, editor-in-chief of the specialist website AviaPort, stated “The result is obvious: as a drop in traffic is inevitable, they must return planes to lessors, reduce foreign currency costs and lower the number of planes and flights.”
Russian airlines have leased and placed new orders for planes from Airbus and Boeing to replace an ageing fleet of fuel-thirsty Russian aircraft. However concern exists regarding the third-largest Russian airline, Utair. Currently unable to reduce its debts, Alfa Bank has been trying to seize Utair's aircraft through court proceedings.