Planemakers win as oil price fuels airline upgrades

1722

For planemakers, rising jet fuel costs are proving a boon as airlines are forced to splash scarce cash on fuel-efficient aircraft to offset oil prices.

Aircraft orders totalling US$31 billion across three continents last week show how much airlines are spending at a time when many of them are still struggling to recover from the economic crisis.

The conundrum is how to balance the need for new planes with the heightened uncertainty around fuel prices caused by recent turmoil in the Middle East and North Africa.
“If fuel prices hit a high like 2008, the airlines that will come out on top are the ones who have new aircraft, which are around 20 percent more fuel efficient than the older generation,” Peter Morris, chief economist at British aviation consultancy Ascend, said.

Last week International Lease Finance Corp, the world’s biggest aircraft leasing firm, ordered 100 narrow body jets from Airbus and 33 from Boeing. Other large orders came from Turkish Airlines, Air China, Cathay Pacific and Hong Kong Airlines.

Germany’s Lufthansa approved orders on Wednesday for 30 new passenger jets from Airbus and five new cargo planes from Boeing. The total planned order is worth US$4 billion at list prices, including US$1.3 billion for Boeing.

Airlines have a tough job to balance their desire for new planes to maximise long-term profits and the need to conserve cash to cope with a short-term fuel spike, Davy Stockbrokers analyst Stephen Furlong said.

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.

Brent crude has risen 20 percent so far this year, driven by uncertainty over Libya and fears that violence could spread to other top oil producing nations. A barrel for April delivery now costs around $110.

Last year’s recovery in air transport demand helped airlines return to the black, with some heading for record profits, but steadily rising oil prices could slow that recovery.

Industry body IATA has said it expects global airlines’ net profits to halve to US$8.6 billion this year as rising costs, especially oil prices, offset increasing demand.

The industry has already had to deal with the fallout from the Icelandic ash cloud and freezing winter weather over the last year and more recently with unrest in North Africa and the impact of the earthquake in Japan.

Since the start of the year shares in IAG – formed by the merger of BA and Iberia – have fallen a quarter, while Air France-KLM and Lufthansa have fallen 20 and 17 percent respectively, underperforming the Stoxx Europe 600 travel & leisure Index’s 9.95 percent drop.

Shares in U.S. airlines and their Asian peers have also shed more than 10 percent in 2011, largely on oil price worries.

Underlining the issue of rising oil prices, Australia’s Qantas, IAG and Singapore Airlines have raised fuel surcharges on flights to offset higher fuel bills.

Since the 2008 oil crisis airlines increasingly hedge in the oil market, but price competition means they cannot pass all extra costs on to customers and instead take a hit to profits.
“Airlines have learnt about stabilisation through hedging and optimising load factors but the best way to stay ahead is to have a modern fleet — Middle Eastern and Asian carriers seem to be the ones with the cash to do that now,” said Ascend’s Morris.

There is also the danger of fewer people flying.
“If oil stays close to these levels over the coming months and airlines raise prices in the autumn and winter we will start to see a negative impact on revenue as fewer people choose to travel,” said BGC Partners analyst Howard Wheeldon.
“Airline customers decide what the tipping point is based on what they are charged to fly…I see that point coming if oil reaches anything above US$130 a barrel.”

Another reason for airlines to invest in new planes is their entry into the European Union’s carbon market.



From 2011, 4,000 aircraft operators will be included in the EU’s Emissions Trading Scheme, costing the industry some 1.4 billion euros in 2012, analysts estimate.
“As an airline if you’re suffering every time one of your planes takes off with higher fuel burn it doesn’t bode well for your financial future,” said Ascend’s Morris.