Comment
Pros and cons of cheap fuel
March 1st 2016
Fuel is an airline’s largest expense. The fact that oil is at its lowest price in years is a massive boost for an industry that was paying more than US$120 a barrel for aviation kerosene 19 months ago. Read More »
With crude oil prices at a 12-year low, the industry’s annual fuel bill will be cut by $12 billion this year, the International Air Transport Association (IATA) has forecast. Fuel is expected to average 19% of operating costs in 2016 compared with up to 40% last year and 25%-30% in 2014. Operating margins for the industry are predicted to be the highest in more than 50 years at 8.2%.
But cheap jet fuel alone will not position airlines for long-term sustainable profits, particularly during this period of development in the Asia-Pacific. President of Emirates Airlines, Sir Tim Clark, told Middle East media in January that lower fuel costs was “a double edged sword”.
He said the plunge in fuel prices lowered operating costs, but it also impacted on global business confidence and fostered market volatility.
In the region, a beneficial oil price has been offset by the depreciation of many local currencies against a rising U.S. dollar. Additionally, a number of the best managed Asia-Pacific airlines have hedged a significant proportion of their fuel costs at prices that are double, and often triple, the present spot price for oil.
Another challenge to healthy airline balance sheets is the ever constant issue of over-capacity. Hundreds of new airliners have been ordered by Asia-Pacific carriers and the need to build load factors on these expanded fleets is creating downward pressure on airfares, especially in a low fuel price environment.
Asia-Pacific LCCs now carry 54% of passenger traffic in the region. They also are among the worst culprits in terms of the aircraft capacity they have on order. With these commitments in mind, IATA director general and CEO, Tony Tyler, said in Singapore last month that several airlines in the region are reviewing their fleet plans. They are likely to cancel or defer some of their airliners to avoid a new period of excess aircraft supply, he said.
But these are not the only issues that have emerged since oil hit its historic low. It was absolutely critical that airline management did not allow the shrinking fuel bill to reduce commitments to efficiency gains at their carriers, Clark said.
Another factor to consider is the industry’s commitment to reducing emissions from aviation. It is an issue of particular relevance in a low fuel cost environment. Some airlines are considering returning older, gas guzzling aircraft to flying because oil is so cheap. It is a decision that will hinder the industry goal of being carbon neutral by 2020 and set back the ultimate target of a 50% cut in emissions by 2050.
There are some rocky months ahead.
