Monday, February 23, 2015

The Cause and Effect Of Low Fuel Cost

The stock market is taking a pause on Boeing stock value. The primary culprit is lower fuel cost. Customers get to inhale during the Lower Fuel Price Period  (LFPP). This is how it works for those who have not considered Boeing's stock valuation effect. The LFPP represents about one third the cost of a ticket to anywhere. This is not a spot condition limited to a segment market. It is universal to all markets in the world. It is a holistic influence to an airline's operational cost efficiency. The ticket seat ticket price doesn't fall immediately. As in the price of gasoline pumped into a car, the per gallon price drop comes somewhat later and rises faster as it increases. This trade phenomena occurs in the airline industry. A lower fuel price causes a somewhat delayed lower ticket price for its customer. Expect a rapidly climbing ticket price when Jet A increases to its former place in the fuel market.

The question under review in the stock market is what happens to airline pricing above the Jetway transactions? How will they replace old equipment or expand fleets in a down fuel market? Wall Street expects a lower stock valuation from lower Boeing sales of its aircraft. The cause and effect of all this does lead to a sluggish purchasing plan by airlines from fundamental transitions from high fuel cost to low fuel cost. This transition however is only temporary until the effects of low fuel is normalized through competitive market forces catching-up.

Variables driving the travel market from low fuel prices brainstorming session:

  • Low airline ticket price is the source of all changes in Balance sheet dynamics
  • Low fuel price affects lower operational costs
  • Lower fuel prices affects a positive profit margin initially
  • Slowly adjusting lower ticket prices affects by shrinking the profit margin slowly.
  • Increased  passenger numbers increase Revenue in total but not the revenue per passenger rate.
  • Using old equipment strategy works until fuel prices bottom out and start rising again.
  • Buying new equipment is deferred until competitive pricing bottoms and then starts rising.
  • A formula from data can demonstrate cause and effect of these conditions.
  • Buying new equipment began in 2006 when fuel was a much lower price indicating market balance.
  • Market balance dictates purchasing new equipment that was delayed during fuel price dump. 
As one can see many factors will cause and effect an airline's purchasing regimen. I didn't even start with cash flows or leasing options, and I didn't consider many other operational and competitive route changes affected by low fuel prices. So the point I will make are those same ones made during the study of economics.

The Market will find its supply and demand equilibrium when a major component changes drastically such as fuel prices. Temporary anomalies will occur during a period such as the LFPP. One such anomaly is a temporary freeze on purchases. However, that builds up pressure for additional purchases outside usual stream of new equipment. If an airline doesn't order because they are playing the balance sheet opportunity from the LFPP, then it will have to make up ground later when the opportunity passes.

A second look, tells something on the Boeing backlog. It is rapidly shrinking and airlines can't use that for cover. The backlog was so far out, they were hesitant to get in line with an order. The backlog opportunity is opening up as it shrinks. Airlines need to get on the books even though it is in the LFPP. Market forces are squeezing down on delaying purchases, and using old equipment during this LFPP. In spite of the fuel price reduction, 2015 should be a good year for the Boeing order book in the second half of the year.