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Are American Airlines Benefiting From Low $?  
User currently offlineVinnieWinnie From United States of America, joined Nov 2005, 803 posts, RR: 0
Posted (4 years 9 months 2 weeks 1 day 4 hours ago) and read 3256 times:

Here is my theory:

the Euro reached $1.50 to the Euro. CO, AA, UA, US, Delta must all have benefited from this low exchange rate for several reasons:

1) EU airlines become comparatively more expensive for American travelers
2) US airlines can price up their flights slightly more expensive than normal and still undercut EU airlines that have their costs in Euros.

This must have pushed load factors and yields up compared to the normal average exchange rate (Something like 1 euro = $ 1 - 1.20)

Now I know that both sides of the Atlantic have faced a enormous crisis which has affected demand in general. But all things being equal American airlines must have had it good in this tough times compared to European airlines.

Do you agree?

PS: I haven't talked about hedging. Do airlines hedge their currency risk?

8 replies: All unread, jump to last
 
User currently offlineRichard28 From United Kingdom, joined Aug 2003, 1633 posts, RR: 6
Reply 1, posted (4 years 9 months 2 weeks 1 day 4 hours ago) and read 3213 times:

Quoting VinnieWinnie (Thread starter):
PS: I haven't talked about hedging. Do airlines hedge their currency risk?

I would think many of them outside of the US have to, as oil is always priced in US dollars.... perhaps someone can confirm?


User currently offlineMasseyBrown From United States of America, joined Dec 2002, 5604 posts, RR: 7
Reply 2, posted (4 years 9 months 2 weeks 1 day 3 hours ago) and read 3093 times:

Quoting VinnieWinnie (Thread starter):
the Euro reached $1.50 to the Euro. CO, AA, UA, US, Delta must all have benefited from this low exchange rate for several reasons:

Consider, however, that the weak dollar also meant that fuel cost more in dollar terms.

Quoting VinnieWinnie (Thread starter):
I haven't talked about hedging. Do airlines hedge their currency risk?

Some do. Northwest, for example, was good at currency hedging and disciplined. The more international the airline is, the more likely an experienced management is to hedge currencies.

Fuel and interest rate hedges are also common. All three items are big cost elements for an international carrier and are interrelated and more or less out of management's control without hedges.



I love long German words like 'Freundschaftsbezeigungen'.
User currently offlineViscount724 From Switzerland, joined Oct 2006, 26021 posts, RR: 22
Reply 3, posted (4 years 9 months 2 weeks 1 day 3 hours ago) and read 3052 times:

Quoting VinnieWinnie (Thread starter):
1) EU airlines become comparatively more expensive for American travelers
2) US airlines can price up their flights slightly more expensive than normal and still undercut EU airlines that have their costs in Euros.

Regardless of exchange rates, all airlines have to offer competitive fares. That's just one of the risks of the business. Also have to keep in mind that not only fuel, but the aircraft themselves, are priced in US$, so those major cost elements drop for European carriers when the euro is strong. European carriers also usually carry a higher percentage of passengers from Europe than from the U.S. and a strong euro makes trips to the U.S. cheaper and results iin increased traffic, while U.S. airlines, that carry a higher percentage of U.S. passengers, lose passengers on their transatlantic flights since trips to Europe become more expensive.

Companies in Eiurope that are negatively affected by a strong euro are the aircraft manufacturers, notably Airbus, and parts suppliers, since their costs are largely in euro but prices are fixed in US$.

[Edited 2010-03-17 12:10:17]

User currently offlinebobnwa From United States of America, joined Dec 2000, 6538 posts, RR: 9
Reply 4, posted (4 years 9 months 2 weeks 1 day 2 hours ago) and read 2903 times:

Quoting Viscount724 (Reply 3):
European carriers also usually carry a higher percentage of passengers from Europe than from the U.S. and a strong euro makes trips to the U.S. cheaper and results iin increased traffic, while U.S. airlines, that carry a higher percentage of U.S. passengers, lose passengers on their transatlantic flights since trips to Europe become more expensive.

Your reasoning is wrong in one important aspect. All carriers flying from Europe to the US carry a higher percentage of European originating passengers, than US originating passengers. This has been true for many years regardless of the value of the Euro and is true of all European carriers as well as all US carriers.


User currently offlineViscount724 From Switzerland, joined Oct 2006, 26021 posts, RR: 22
Reply 5, posted (4 years 9 months 2 weeks 1 day 2 hours ago) and read 2826 times:

Quoting bobnwa (Reply 4):
Quoting Viscount724 (Reply 3):
European carriers also usually carry a higher percentage of passengers from Europe than from the U.S. and a strong euro makes trips to the U.S. cheaper and results iin increased traffic, while U.S. airlines, that carry a higher percentage of U.S. passengers, lose passengers on their transatlantic flights since trips to Europe become more expensive.

Your reasoning is wrong in one important aspect. All carriers flying from Europe to the US carry a higher percentage of European originating passengers, than US originating passengers. This has been true for many years regardless of the value of the Euro and is true of all European carriers as well as all US carriers.

That's probably true, but I still tend to believe (don't have any data) that LH (for example) carriers a higher percentage of German-originating passengers than U.S. carriers serving Germany, and vice versa for U.S. -originating passengers on U.S. carriers. Similar reasons to Japanese passengers tending to prefer flying on their own airlines since they know they will be able to communicate easily in their own language etc. That's not always the case on foreign carriers.


User currently offlineSomeone83 From Norway, joined Sep 2006, 3516 posts, RR: 3
Reply 6, posted (4 years 9 months 2 weeks 1 day 1 hour ago) and read 2709 times:

Not really that much. Yes they get less revenue for US originating passangers and other buying their tickets with $, but as both fuel and aircrafts are traded in $ is the lower revenue offset by lower costs

User currently offlinevv701 From United Kingdom, joined Aug 2005, 7742 posts, RR: 17
Reply 7, posted (4 years 9 months 2 weeks 22 hours ago) and read 2525 times:

It is a swings and roundabouts situation. .

I have never worked in the airline industry but I have spent a working lifetime working for two American corporations in Europe. For both I marketed products manufactured on both sides of the Atlantic. We never altered prices because of changes to the exchange rate. This has ranged from US $1.03 to £1.00 in the early/mid 1980s and has been over $2.03 more recently and is now roughly half way in between.

When the exchange rate moveed in our favour we did not lower our prices in Europe. Instead we took a larger margin and remained locally price competitive.

Then when the exchange rate moved against us we remained locally price competitive by taking a smaller margin using some of the "fat" from the "good" exchange rate years to cushion the impact of the "bad" exchangge rate.

A very strong reason for doing this is because customers do not like price increases. And if you lower your prices to grab market share when the exchange rate is favourable, when it moves against you you are going to have to upset a lot of customers by increasing prices way above the rate of inflation. And by then your customers will have forgotten how they benefitted when you lowered your local prices to share your exchange rate benefits with them..

This does leave one problem that I have personally experienced. The more savvy customers ask why you are putting your prices up on US produced product when the 12 month change in the exchange rate suggests you might actually drop them even after a resonable allowance for inflation. Then, if it is a key customer - one of mine was the rather large British National Health Service - you need to show the prices they paid year by year for your product with those prices denominated in both the local currency - what they actuially paid - and in US Dollars - what they actually paid converted to $s at the then prevailing exchange rates.

So if they follow a similar pricing policy, US airlines will currently be benefitting in that sales in the Euro Zone will be yielding a higher profit (or lower loss) due to exchange rate. But on the other hand Sterling has recently been weaker than the US $. So this extra margin on Euro Zone sales will be partly, wholly or more than balanced (depending on the airline's ratio of Euro Zone to Sterling sales) by a lower margin on Sterling sales.

So we end up where we started: It is a swings and roundabouts situation.


User currently offlineworldtraveler From , joined Dec 1969, posts, RR:
Reply 8, posted (4 years 9 months 1 week 6 days 22 hours ago) and read 2170 times:

US airlines do have a point of sale advantage from the US and vice versa for Europe.... it isn't true for all airlines in all parts of the world. NW obtained a disproportionate share of its Pacific revenue from Japan which is why they were aggressive in and usually pretty good at currency hedging.

The largest benefit of the weak dollar is that it makes tourism to the US favorable. I believe the US has recently started a global advertising campaign supporting US tourism. US tourism is good for US airlines and for the broader US service economy.

BTW, the title should be US airlines... even you use American, airlines should not be capitalized.


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