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Down goes oil prices, but IATA forecast remains grim

Written by editor

Oil prices have fallen below US$67 per barrel for the first time in 15 months, sending US airline shares sharply higher, despite the first quarterly loss in 17 years for Southwest Airlines.

Oil prices have fallen below US$67 per barrel for the first time in 15 months, sending US airline shares sharply higher, despite the first quarterly loss in 17 years for Southwest Airlines.

As the oil price has crashed, Southwest has taken a huge hit on the relative value of its hedge contracts, until recently the envy of the rest of the airline industry. With falling load factors and rising non-fuel costs (+1.8 percent in 2008 quarter two), Southwest’s market darling status could quickly evaporate.

Still, the stock soared overnight as the broader US market. Stocked jumped for United Airlines, Continental, Delta and American. There is an expectation falling oil prices will offset any slowdown in passenger demand. This is probably illusory.

A big slowdown looms. The International Air Transport Association (IATA) has warned its September financial forecast of a 2.5 percent growth in global passengers numbers over next year “now looks optimistic” and a contraction in demand now looks plausible. The industry body is concerned about the depressed prospects for business travel, given its role as a key driver of long-haul and network airline profitability. Falling air travel demand could come as a shock to many, the way falling house prices did to Wall Street.

High drama in India – tearful Goyal takes back sacked Jet workers. At a late night press conference recently, an emotional Jet Airways founder and chairman, Naresh Goyal, has reversed his executive team’s decision to sack 1,900 staff. The original decision created a political storm in India – a storm that Air India is aiming to sidestep with its plans to offer voluntary redundancy to up to 15,000 non-operational staff (with a 3-5 year leave with no pay option).

Mr Goyal stated that his conscience didn’t allow him to “look at the mere economics only”, but he called on all employees to “work together to find a way out of the crisis.”

His leadership and compassion must now be quickly matched by the government in the form of an airline industry support package, with soft loans and tax cuts.

Mr. Goyal and his team can take heart from falling oil prices, which Jet, Air India, Kingfisher and others must now pass on in the form of lower surcharges and fares, to get India flying again this festival season.