Airline business travel growth battles fuel factor


The recovery in business travel and exposure to fast-growing emerging markets are becoming the driving factors in the airline industry and those without it have no buffer against higher fuel costs.

Tuesday’s batch of industry results demonstrated this, with profits from Dubai’s Emirates powering ahead on high-end travel growth while UK-based easyJet and Scandinavian airline SAS were both driven into losses by rising kerosene prices and a faltering economic recovery in Europe.

Carriers across the world have seen first and business-class travel — the most profitable part of their passenger businesses — grow steadily in recent months, fuelled by increased travel to emerging markets.
“Business travel has come back over the last year, not just in the Middle East with the likes of Emirates, but all over the world,” said BGC Partners strategist Howard Wheeldon.
“But economy class continues to suffer because of economic uncertainty but oil prices, which I think may well rise again, are the big caveat for airlines large and small.”

Carriers across the world have seen first and business-class travel — the most profitable part of their passenger businesses — grow steadily in recent months, fuelled by increased travel to emerging markets.

Britain’s BAA, the owner of London’s Heathrow — one of the world’s busiest airports — has, in recent months, reported a steady rise in long-haul business traffic, especially to China and India.

And the International Air Transport Association (IATA) said last month that premium air travel held up well in February, slowing to 7.7 percent from 8.1 in January as economy travel growth slowed more steeply to 3.3 percent from 4.9.

IAG, formed by the merger of British Airways and Iberia, Lufthansa and Air France-KLM have all said premium travel remains relatively strong.

EasyJet wants to cash in on this growth itself, and said it would roll out a plan to entice more corporate clients onto its planes in the second half of the year, which it expects to add to its revenues, sending its shares up.

InterContinental Hotels the world’s biggest hotelier, has also seen profits grow thanks to the return of the U.S. business traveller and predicted stronger bookings and higher room rates for the rest of the year.

U.S. rivals Starwood Hotels & Resorts Host Hotels & Resorts and Hyatt have also reported recent rises in earnings benefiting from increased business travel.

But rising fuel prices are causing trouble for the industry and, coupled with unrest in the Arab world, could wipe out airline profitability in 2011 and hinder the industry’s recovery, IATA said earlier this month.

Emirates said its operating costs rose almost a quarter and put this largely down to fuel, while easyJet’s losses almost doubled due to a 43 million pounds increase in its fuel bill in the six months to the end of March.

SAS, which posted a first-quarter loss, said it still hoped to be in the black this year though recent fuel price increases made this more challenging.

SAS shares in Stockholm were 6.5 percent lower because of what Sydbank analyst Jacob Pedersen called “increased uncertainty” around future profits and fuel price volatility.

Fuel accounts for up to a third of an airline’s operating cost, and a steep price rise could hurt the industry’s efforts to recover from the global financial crisis, particularly given that it often operates on notoriously narrow margins.

International oil prices hit a 2-1/2 year high last month as unrest spread in North Africa and the Middle East and fanned concerns supply could be disrupted.

Brent crude has risen 20 percent so far this year, with a barrel for June delivery now costing around $115, while U.S. crude is still hovering around the $101 per barrel.

However, for planemakers such as Airbus and Boeing, rising fuel costs are proving a boon as airlines are forced to splash scarce cash on fuel-efficient planes to offset price rises.

The impact of rising oil prices has been compounded by challenging trading conditions in Europe, where retailers have issued profit warnings as inflation, unemployment and fears of higher interest rates hit consumer confidence.

Europe’s biggest tour operators TUI Travel and Thomas Cook have both given downbeat assessments of the mood of UK consumers this week, with Thomas Cook warning its UK performance would be worse this year than in 2010.