Crashing Oil Prices and Travel’s Catch-22

You can’t get much cheaper than negative prices.

As the world knows, oil briefly went negative this week before rebounding, showing the breathtaking speed a downward tack can take when demand dries up and so, too, does storage. And the ripple effects presage a shift across several verticals well beyond the oil patch, toward the travel industry and elsewhere.

As stay-at-home and shelter-in-place orders have kept tens of millions of people in the U.S. indoors, the roads are less traveled. Nationwide the price of a gallon of gas is $1.80, which is more than a dollar cheaper than seen this time last year.

The prices of two benchmarks, as noted by  CNBC — WTI and Brent — are down by 70 percent year to date. Seemingly there is no price that would entice buying, or critically, the use of the commodity. And if the commodity goes unused, it must be stored. It’s been widely reported that storage capacity is running low.

“With prices at this level, everyone loses,” said Ben Cahill, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies, as quoted by The Washington Times. “There are no winners with $20 oil. You could say consumers win because gasoline prices, diesel prices, jet fuel, would be cheaper. But that’s almost irrelevant now because no one is driving or flying.”

And here, then is the ripple effect: While business, in general, loves lower cost inputs — energy among them, which can be variable and volatile, and can wreak havoc with margins. Airlines offer a case in point: Lower jet fuel prices should be a boost to margins. But Delta’s results showed that even with $2 billion in reduced fuel costs, the company still posted its first quarterly loss in eight years.

Flight cancellations are outpacing new bookings, and its cash burn can be slowed only by cutting flights (but then again it costs money even to idle flights). Delta said in commentary tied to its earnings release Wednesday that reduced fuel costs would lessen expenses by $5 billion in the current quarter. Yet as management has noted — per a memo from CEO Ed Bastian to airline staff, relayed by Travel Pulse — the recovery will be a long time in coming.

As Bastian wrote in the memo, “We don’t know when it will happen, but we do know that Delta will be a smaller airline for some time, and we should be prepared for a choppy, sluggish recovery even after the virus is contained,” Bastian wrote in a staff memo. “I estimate the recovery period could take two to three years. I hope it’s sooner, but we need to be realistic in our planning.”

Delta’s results, in a nutshell, show that even a recovery may be muted on the other side of the pandemic. If energy prices stabilize as time goes on (to some sort of new normal), yet demand languishes, margins suffer.

The Catch-22

Thus, the Catch-22 of travel: Low energy prices won’t spur travel, and travel will not offer a floor for energy prices.

Get ready, then, for leisure to be transformed, at least for the companies responsible for ferrying us about — the cruise ships and the airlines among them. Waiting for demand to return is no easy feat.

To get a sense of how waiting may exact an unforgiving toll (or may not be feasible), consider the fact that Expedia Group is in advanced talks to sell at least a stake in itself to private equity outfits Silver Lake and Apollo Global Management. That deal-making would, of course, come as the travel bans in place across the globe have it online booking firms’ businesses, including Expedia’s. The investment would be roughly $1 billion — indicating the only things that the steep falloff in travel demand, the oil glut and the wait for some sense of normalcy have ignited is: deal-making.