Rising oil price will make airlines suffer – IATA

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The International Air Transport Association (IATA) has warned that a sustained increase in oil prices could threaten the airline industry’s return to profitability. The organisation says that oil prices will increase costs by more than this year’s projected earnings.

On December 14 IATA forecast a net income of US$9.1 billion in 2011 for the airline industry, based on oil at US$84 a barrel. However, with crude oil trading at US$91 a barrel, and every US$1 increase boosting the fuel bill by US$1.6 billion, costs could increase by US$11 billion. The price of Brent crude touched US$100 a barrel for the first time in two years on Tuesday.

IATA is predicting that passenger traffic will grow for the second consecutive year after its financial crisis-driven drop in 2008. Demand for air travel grew by 8.2% in 2010 and by 20.6% for air freight, outstripping a 4.4% growth in capacity, according to the association. As a result, airlines posted estimated earnings of US$15.1 billion last year.
“Airlines ended the year slightly ahead of early 2008 volumes, but with a pathetic 2.7 percent profit margin,” said IATA Director General Giovanni Bisignani. “The challenge is to turn the demand for mobility into sustainable profits,” he added.

However, with the price of oil rising amidst political turmoil in Egypt and the Middle East, the profit from increased demand could quickly disappear. “Fuel accounts for 27 percent of operating costs and a sustained rise in the oil price could spoil the party,” Bisignani said.

United Continental Holdings may need to cut flying this year if fuel stays at current prices, its CEO Jeff Smisek told investors last week. United Continental Holdings is the holding company for United and Continental airlines which together form the world’s largest airline.

As a result of the price increases, many airlines around the world have increased their fuel surcharges, which are additional charges added to cover fluctuations in the price of fuel. The Civil Aviation Department of Hong Kong last week published a report showing that 56 airlines were raising passenger fuel surcharges for February.

For instance, Quantas has announced it will increase its fuel surcharges, with ticket prices rising on or after February 19. Qantas chief executive officer Alan Joyce said that oil and fuel prices had recently experienced sharp increases.
“Year to date average prices for both West Texas Intermediate Crude Oil and Singapore Jet Fuel are at their highest since FY08, and second half FY11 prices are forecast to be around 20 per cent higher than in the first half,” Joyce said.

Yesterday Air France announced it had increased the fuel surcharge on its air fares to offset rising fuel costs, with effect from February 1.



Meanwhile, South African Airways (SAA) announced last week that it had increased its fuel surcharges by between US$5 and US$30 per leg/sector, with effect from tickets issued after 27 January. Other African airlines that are raising fuel surcharges include Air Mauritius, Ethiopian Airlines and Kenya Airways.