2020 Forecast: How Oil Spot Prices Could Affect Your Managed Air Program
By Mike Eggleton, Director of Research & Intelligence
As a travel manager, there are many things you can control and tweak to affect the success of your travel program. There’s the mix of airlines and hotels you include, the details of your travel policy, and the messages you send via the online booking tool to guide travelers towards more on-policy decisions.
But there’s one factor you’re NOT in control of that has a big impact on your travel program. That factor is the oil spot price, which is what airlines pay for the immediate delivery of oil. Whether you’re paying attention to spot prices for oil or not, they affect the deals you can strike with air carriers, and your ability to meet your revenue and savings goals.
BCD Travel’s 2020 Industry Forecast examined the influence of global oil prices. Here’s a snapshot of the latest outlook for oil prices and air travel in 2020.
What’s the Sweet Spot For Oil Prices?
So, what’s the big deal with oil spot prices? Believe it or not, there’s a sweet spot for air carriers, which affects the deals they can offer you.
When the oil price is high, it’s hard for airlines to make a profit. After all, fuel accounts for 20%-30% of an airline’s operating costs. And when it’s too low, it encourages excess capacity, which may drive down fares (if demand doesn’t keep pace) and may encourage travelers to make environmentally unsustainable travel choices.
So, what’s the sweet spot that keeps everyone happy? According to the 2020 Industry Forecast, a price between $60 and $75 a barrel of brent crude is in everybody’s best interest. It’s in a range where airlines can still make a profit, while discouraging excessive expansion of supply and demand.
Factors Affecting 2020 Oil Prices
The good news is that in 2019, oil prices were relatively stable for most of the year. That’s good news as we begin 2020. In 2019, oil prices remained within the ideal band for airlines.
While sanctions have kept Iranian supply from entering the global market, U.S. producers are making up the shortfall. Add to that slower economic growth in some markets, and the stage is set for a stable oil supply and relatively weak demand. Such is the sense of balance between supply and demand that the market has absorbed two recent supply shocks: a missile attack against Saudi refineries and the escalation of tensions following the attack on the U.S. embassy in Baghdad. Oil price stability is good news for air carriers, and therefore for your travel program.
The Outlook for Air Carriers
One of the reasons why this matters so much is that fuel represents 20%-30% of an air carrier’s cost. That means any increase in the oil spot price has an immediate impact on the bottom line. The way airlines buy their fuel is also a factor. Few airlines hedge their fuel, taking a risk on making a good deal in advance. Instead, most get any extra fuel they need at the spot price.
In the past, airlines made up for high oil prices by increasing capacity. More passengers equals more revenue, even if the oil spot price is high. But for 2020, most airlines can expect improved margins, as the 2020 Industry Forecast predicts that oil prices will remain in the $65-$70 range.
It’s not all good news, though. That’s because oil’s not the only factor likely to affect airfares in 2020. Industrial disputes are pushing up labor costs, further tightening airline margins. And the loss of capacity caused by the grounding of the Boeing Max 8 has put upward pressure on fares, although this should ease in the second half of 2020, once the aircraft return to service. The one bright spot is the introduction of more fuel-efficient aircraft. As airlines put more into service, their fuel consumption will come down, impacting fuel surcharges in the short-term. Travel Managers should monitor the trend – particularly from points of sale in Japan and Hong Kong, as surcharges in these markets are heavily regulated and provide a good level of transparency on the overall trend.