For the airlines, higher fuel prices can squeeze already tight margins. In turn, airlines are likely to pass the costs on to consumers in the form of higher fares and fuel surcharges. Since most airlines use a very responsive dynamic pricing model that quickly incorporates a number of variables into fare prices, the impact on the consumer is almost immediate. ?
On March 2, the price of jet fuel hit $100 a barrel and has gone up significantly since. Airlines that had dropped surcharges when oil costs dropped through 2008 and 2009 started reintroducing them.?
Jet fuel jumped from about $80 a barrel in May 2010 to about $140 a barrel 11 months later, more than a 75 percent increase, according to Platts, a global provider of energy information.?
It dropped in May to about $125 but still significantly higher year over year. As of the first week of May, the cost of jet fuel was down 8.5 percent from a month earlier but 39.4 percent higher year-on-year.?
“Despite the weaker trend during May, jet fuel costs still represent the most significant overhead for low-cost carriers, and certainly the most variable,” says Paul Young, executive oil pricing editor at Platts.?
The price of jet fuel has risen even faster than that of crude oil. In Asia, Dubai crude is the benchmark. In April, the premium for jet fuel over Dubai crude topped $25 a barrel, more than double the average $12.31 per barrel throughout 2010 – although it eased to around $20 in May.?
In other words, crude oil is getting more expensive, but so is the refining process and that sends the cost of jet fuel upwards. ?
Jet fuel and gasoil, two distillates, “are from the same part of the barrel,” says Young. Increased demand for distillates in Asia, particularly China, sent prices up. China has tried to cut back on coal burning and industrial customers bought diesel generators and that made the country a significant gasoil importer during the last quarter of 2010. ?
The earthquake and tsunami in Japan tightened the gasoil market further.?
In 2003, fuel accounted for 14 percent of operating expenses for the airline industry. As of last year, fuel costs for the global airline industry amounted to $139 billion or 26 percent of operating expenses and that was with Brent oil at $79.4. ?
At $96 Brent oil, the global airline industry’s fuel bill could total $166 billion, which accounts for 29 percent of operating expenses, according to the International Air Traffic Association (IATA). A single dollar increase in the price of oil translates into $1.6 billion in additional costs for the industry. ?
“As if the rising price of oil was not challenging enough, governments are increasing the cost of mobility with a growing contagion of taxes,” says Giovanni Bisignani, the IATA’s director general and CEO in February.?
Most airlines have dealt with higher fuel prices with a number of initiatives to raise load ratios – filling up planes with as many passengers and as much cargo as possible – while improving efficiencies, raising fares and bringing back fuel surcharges.?
Low-cost carriers, no-frills airlines that have fewer avenues to cut costs, have fewer options to deal with the higher cost of such an essential input.?
“Fuel costs take up a larger percentage of costs for low-costs carriers,” says Kelvin Lau, an aviation analyst at Daiwa Capital. “Therefore the sensitivity is higher.”?
AirAsia, Malaysia’s low-cost carrier, reintroduced fuel surcharges on May 3 “to offset the escalating jet fuel, which has exceeded $140 per barrel,” the airline said in a statement.?
“We hope that this will only be a temporary measure, and AirAsia will continue to ensure our fares remain low despite the fuel surcharge.”?
In February, Singapore Airlines raised the surcharge by 16 percent. Most international airlines have taken similar steps. Low-cost airlines are also bumping up prices. AirAsia’s fuel surcharges amount to RM10 ($3.3) for domestic flights and nine times that much for international routes.?
Tiger Airlines, Singapore’s low cost-carrier, does not plan to adopt fuel surcharges but it has announced plans to raise base fares to deal with rising costs. ?
On the other hand, the drop in fuel costs in early May can benefit them more than it does the full-service airlines. The converse side of being more impacted by higher costs is that they are in a better position to benefit from the drop and to benefit faster, says Lau. ?
On the positive side, demand for air travel is rising steadily. This is particularly true in Asia’s booming economies. According to Lau, the pass-through to consumers is also dependent on regional demand for air travel. Higher demand translates into fuller flights and that means higher profits – and more options – for the airlines. ?
Overall, Lau sees clear skies ahead for low-cost carriers. ?
The relatively higher cost of fuel appears to impact consumers the most. The sheer uniformity of the change – all airlines have to buy fuel – means all fares are more expensive. ?
“Fuel costs change from time to time according to the political and economic environment. Therefore, it doesn’t have much impact on the carriers themselves.”?
“The increase in fuel costs does not affect the operations of our company directly since the customers will bear the cost themselves through the fuel charge,” says Eva Chan, deputy general manager of corporate communications at Hong Kong Airlines.?
Hong Kong Airlines is a full-service carrier. It provides meals and has a points program but it is generally less expensive than other, larger airlines. It has not been alone in raising fares alongside the rising price of oil and jet fuel.?
“The only indirect impact would be that if the customers think the fuel charge of the ticket is too high,” she says. “That rarely happens. The fuel charge is not a major concern for them.”
China Daily Asia Weekly on May 20, 2011, page 14-15
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