Airplanes And Oil Prices

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While those of us in the cheap seats uniformly cheer for low oil prices because, well, we can buy more gas and fly more, what if the reverse were true? What if anemic oil prices are the cause of declining aircraft sales? Writing this week in Aviation Week, the Teal Group’s Richard Aboulafia made this very argument, albeit one that applies to high-end business aircraft.

Transposing the curves of global oil prices over those of business aircraft sales, Teal finds a fit. When oil is high, or at least higher than the under-$50 average price now extant, sales of high-end aircraft boom; low oil prices have tended to diminish demand. Indeed, for virtually all aircraft, production has yet to recover to pre-2007 levels and since the last oil peak in 2011 ($119), prices have retreated steadily and sometimes dramatically.

Quoting Bank of America/Merrill Lynch analysis, Aboulafia says there’s a correlation between high-end business jet demand and oil prices. Demand rose after the 2008 economic crash just as oil prices did; now as oil prices retreat, so does luxury jet demand. The underlying support for the argument is that resource-rich countries like Russia Middle Eastern states are prime buyers of large, cabin-class jets and when oil prices tank, so do sales.

The correlation is interesting, but I’m not sure I’m convinced. In any case, it’s marginal to the industry as a whole. According to GAMA figures, overall business jet demand has been essentially flat since 2011, but was slightly higher in 2015 than in 2011. The more bracing eye opener for me is the global volume in billing numbers. In 2008, general aviation delivered 3970 aircraft for $24.7 billion in orders. In 2015, it billed $24.2 billion, almost as much, but for 2331 airplanes, ergo, fewer airplanes for just as much money. That’s the perverse world of aviation supply and demand. When demand goes down, prices go up.

Piston sales have clawed back from a low of 889 in 2010 to 1056 in 2015, but they were higher (1129) in 2014. I couldn’t even venture a guess if oil prices have affected sales. New piston airplanes have become primarily a training market so with oil prices soft, do enough more people buy airline trips to spike demand for more pilot training? Maybe, but that’s a claim too tenuous for even a Sunday evening blog.

In the shorter term, lower avgas prices should, theoretically, increase flight activity which, in turn, should boost avgas demand. If this is true, I’d have a hard time proving it. I had a look at the Energy Information Administration’s graph on avgas deliveries and it was flat through 2015, after a sharp decline since 2012. Not that I’m sure how reliable this data is, anyway. Digging into the source tables, you could once find the underlying data supporting these reports. But for the past couple of years, much of it is being withheld, probably to protect proprietary reporting in a continually declining avgas production ecosystem.

The silver lining, if there is one, is that oil prices, such that they can be reliably forecast, seem unlikely to rise sharply for the short term. Lower gasoline prices have spurred driving demand in the U.S., but overall oil demand remains tepid and supply is fat. OPEC, once the fearsome overload of oil production, recently announced a half-hearted plan to cap production in support of price buttressing. This will cause dancing in the streets in Eagle Ford and Bakken but, I suspect, not much change in overall price.

If I were betting, I’d say avgas prices will remain stable for quite some time. That’s not to say low oil prices are an overwhelming benefit for the world economy, but if I don’t focus on my selfish little self-interest here, I’ll never get rid of this splitting headache.

Night at the Movies

Clinging to the oil topic here, I’ll veer toward the shoulder for a few sentences in noting that Deepwater Horizon, the movie, opened over the weekend. When I was lad growing up in the Texas oil patch, I once witnessed a well blowout. The sight of 30-foot sections of drill pipe arcing through the arid sky tends to stay with you.

In depicting the physics of such a calamity, the filmmakers and script writers deserve a nod for not dumbing it down too much for the audience. I have more than passing knowledge of this technology and I had to pay close attention to keep up with the detail. Even with the inevitable artistic license, it was gripping. It’s worth seeing.

Comments (8)

It may be that low oil prices are not the entire story. Business aviation will fly if there is business to be done. With a weak almost flat economy, the big deals are not happening execs are not traveling as much. I notice this when at the Cl D and Cl C airports where most of the heavy iron can be found. Corporations are not flying people around much because there is not much happening. As the economy recovers, there will be more demand to fly for business. More flying means that there will eventually be more demand for new airplanes. It is much easier to justify the cost of a new set of wings to the board of directors when companies are in growth mode.

Posted by: Leo LeBoeuf | October 2, 2016 6:38 PM    Report this comment

Fuel prices have had no effect on rental prices in the area (they keep going up). Since most flight training occurs in rental aircraft, I don't think there would be any change in flight training activity as a function of the recent oil price decrease.

Posted by: Jonathan Cullifer | October 3, 2016 3:40 PM    Report this comment

I am somewhat shocked by the lack of comments as well as the current distribution of answers on the "Question of the Week." Everything I have ever read including conversation regarding avgas pricing has always seemed to me to be a pretty hot button topic inversely related to aircraft ownership and operation. Paul, your article and polling seems to suggest something quite different. I could be totally misreading this, however, this is what I am seeing at this time. The polling distribution alone seems to suggest avgas pricing is really not that big a deal. What am I missing here? If I was a diesel engine manufacturer this would definitely catch my eye. Further serious polling would be warranted. Again, what am I missing here?

Posted by: Thomas Cooke | October 4, 2016 5:03 AM    Report this comment

TC: My interpretation of the polling results thus far is that recently-stable avgas prices have not caused an acceleration of the unmistakable trend of declining flight hours, which I attribute largely to the aging of the pilot population. Even free avgas wouldn't alter that significant factor.

Posted by: Tom Yarsley | October 4, 2016 5:27 AM    Report this comment

Tom, I understand where you are coming from. I am still somewhat dumbfounded by the response both in Paul's article and the polling. I never expected either including the lack of robust commentary.

Posted by: Thomas Cooke | October 4, 2016 6:43 AM    Report this comment

"The polling distribution alone seems to suggest avgas pricing is really not that big a deal. What am I missing here?"

I don't think you're missing anything, Thomas. I think this is exactly right and have said so before. Not sure I know why, but I think it has to do with flying activity and interest in airplanes being diminished for reasons larger than just cost.

Posted by: Paul Bertorelli | October 4, 2016 10:18 AM    Report this comment

In my own unscientific observations around the local airport, the price of avgas has not had a significant impact on flight activity. Assuming there are no major price spikes (i.e. a dollar or more per gallon), people tend to adjust and stick to their schedules. In my hangar group there are the planes that never seem to fly, and those that fly often. As gas prices have fluctuated in the past couple years, the flyers seem to fly and the hangar queens sit. Bear in mind that these are upper level singles and light twins (Cirrus, Barons, Bonanzas, etc.) and not a bunch of old 172s and Cherokees, although I suspect the same environment exists there too. BTW, my own humble Cardinal is pretty much the poor country mouse in this environment.

I live at a Class D airport on the outskirts of Houston, which has plenty of heavy iron that serves the oil industry. Statistics indicate activity in that segment has dropped by about 7% since 2014, driven more by the current malaise in the oil patch than anything else. As Leo observed, this is mostly due to the lack of drilling activity and the attendant support industries - no deals are being done. In a stagnant economy, I suspect the same is happening around the country. Our current avgas prices may be more a result of the lower flight activity, rather than the other way around.

Posted by: John McNamee | October 4, 2016 12:01 PM    Report this comment

It may not hold for pilots who rent "wet" and therefore are directly confronted with the full hourly price of flying, but I suspect most aircraft owners are like me...the fuel cost is, if not exactly ignored, pretty much swept under the (mental) rug.

This is not to say I don't peruse the fuel prices along my route and factor that into my refuel point planning, but the ultimate cost of the fuel isn't a deciding factor in whether or not to launch on a proposed mission.

And a scary line of thought, just in time for Halloween: Typing this post sent me to the computer for some data mining of Quicken and my logging program. The result: For the years 2012 through 2015, the hourly fuel + oil cost for my A-36 was $60.12. I really didn't want to know.

Posted by: John Wilson | October 6, 2016 11:30 AM    Report this comment

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