Oil prices have risen 52 per cent since June 2017 and have put a squeeze on airlines will likely result in higher airfares.
Airlines say airfare increases have not kept pace with increasing oil prices
Airlines executives say rising oil prices are impacting airlines’ budgets and could lead to higher airfares, according to a report by Reuters.
The cost of oil, which usually amounts to about 30 per cent of an airline’s costs, has jumped 52 per cent since June 2017 and now sits at over $67/barrel.
An oil price between $65 to $70/barrel remains “acceptable”, according to International Air Transport Association CEO Alexandre de Juniac.
“It is not so much a competitive differentiator for an airline,” he told Reuters while on the sidelines of a conference ahead of the Singapore Airshow. “It puts pressure on costs and it is more a fare inflation trigger.”
Rising oil prices are hitting the airlines’ bottom lines as fare increases have not kept pace with higher crude prices.
According to Reuters, some airlines in the Asia Pacific region have put in place hedging programs to help cushion the impact of higher oil prices.
Quantas Airways hedges a substantial amount of its fuel requirements says it expects its fuel bill to rise by A$200 million this year. However, the airline has forecast record-level first half earnings of up to A$950 million because it is adding more fuel-efficient jets and is cutting costs in other areas of the business.
“Despite fuel prices being higher than last year, we are digesting fuel very well at the moment,” Qantas CEO Alan Joyce said.
Li Zongling, the president of China’s Okay Airways told Reuters that “last year, we estimated that our fuel costs rose 20 per cent compared to 2016 which had a impact on our profit”. He estimated earnings dropped about 5 per cent due to the higher oil price.
Unhedged Vietnam Airlines JSC said fuel surcharges are now being applied. The airline is concerned that the higher airfares could gradually result in lower demand.
“Especially for passengers traveling for tourist purposes when they see it (fares) past a certain level they say no,” Vietnam Airlines CEO Duong Tri Thanh told Reuters.
Thanh said his company had budgeted for an average jet fuel price of $75/barrel in 2018, but prices have already gone past $80. Refining costs boost the price of jet fuel beyond the value of a standard barrel of oil.
Ryanair, Ireland’s low-cost airline said it expects higher oil prices will push up short-haul airfares in Europe in 2019.