Oil prices dropped toward $40 a barrel in early 2016 and remained below $60 until early this year. Recently, however, they have surged above $70, and with them, gasoline and jet fuel prices. Airline bottom lines and travel have started to be affected.
American Airlines Group Inc. (NASDAQ: AAL) recently canceled some of its routes to Asia. Should oil stay above $70 and move toward $80, the route cancellations will increase, perhaps rapidly. The period of freewheeling air travel and low ticket prices may be about to end.
American’s canceled routes to Asia are among its largest, based on miles traversed. For the time being, these cover routes to Japan and China that originate in the United States. The company’s management announced as an example of the problem: “Our Chicago–Shanghai service is unprofitable and simply not sustainable in this high fuel cost environment and when we have opportunities to be successful in other markets.”
American’s problem is no different from the balance of the industry, although some carriers hedge fuel costs. The most likely victims of higher prices are cut-rate airlines, which do not have the benefit of large numbers of business and first-class travelers and huge networks of hubs that allow them to service any given market from several airports. Super-low fares on carriers like JetBlue Airways Corp. (NASDAQ: JBLU) could disappear. So could low-priced flash sales of tickets many airlines offer, with Southwest Airlines Co. (NYSE: LUV) among those that use the tactic regularly.
As fuel prices dropped, two things happened in the industry. One is that the serial bankruptcies of companies in the industry ended. The other is that carriers added airplanes (or replaced old ones), added staff and increased the number of routes. If those days are ending, the cost to visit grandma this Thanksgiving or Christmas is bound to rise — if the route is even still up and running.