Airline fares set to rise on oil price surge


Air travellers face more expensive ticket prices as airlines do their best to pass on an estimated US$50 billion rise in fuel costs this year, Asia’s leading industry body said on Friday.

Andrew Herdman, director general of the Association of Asia Pacific Airlines, said fares would need to increase by 10 percent to compensate for high oil prices, but analysts have questioned whether carriers will be able to completely pass the costs along.

His remarks came ahead of next week’s annual meeting of the International Air Transport Association (IATA) where global airlines are expected to slash industry profit forecasts.
“Last year we almost got used to US$80 a barrel and had a great year. But with oil prices at US$100 and above, the challenge is how do you pass on that higher cost,” Herdman said in an interview.
“The industry right now is basically looking at an annualised US$50 billion cost increase and that is bound to push up fares. When revenues are (around) US$500 billion, fares have to go up by 10 percent,” he added.

Last year, the industry recovered faster than expected from the recession, posting a record profit of US$16 billion, thanks to rising demand and moves to shed capacity. But the IATA has said its recent 2011 forecast for US$8.6 billion profits now looks optimistic.

The IATA used an average oil price of US$96 a barrel for Brent crude when it forecast a profit of US$8.6 billion, but the year-to-date average has reached more than US$110 a barrel.

Herdman said an average oil price of more than US$120 barrel could result in annual losses for the industry because it operates on razor thin margins.

At the peak of the global recession in 2009, the industry posted an annual loss of nearly US$10 billion, forcing carriers to cut capacity by grounding aircraft and reducing their headcount.

Herdman said airlines, especially in Asia, tend to reduce fuel hedging as oil prices continue to increase. Many of them do not want to be caught in the wrong side of the market if oil prices suddenly collapse as they did in the 2008.
“We’re facing huge volatility that makes hedges more expensive. So generally people are doing less hedging than they would because they got bitten badly in the last couple of years,” he said.
“Hedging is not a long-term solution to anything. Some airlines take the view the only way to hedge is to put it in the fare, so don’t bother hedging fuel, but just adjust your prices dynamically,” Herdman said.

In 2008, the crude oil prices collapsed from a historic high of US$147 a barrel to US$32 in a space of six months, forcing carriers to post billions of dollars in hedging losses.

Some airlines have re-introduced fuel charges as Middle East tensions helped push up oil prices this year, but analysts question whether they have succeeded in passing on the full impact to customers because demand remains volatile in the face of a sluggish economy.

Singapore Airlines and Qantas have increased fuel charges three times so far this year and warned that fuel price as the biggest risk for the industry. Cathay Pacific Airways also received approval in March to raise its fares.