Fare rises limit fuel pain

With the price of crude oil edging towards $70 a barrel, compared with $55 in mid-March, airlines are reliant on fare hikes or surcharges to compensate for the shortfall.

As oil prices continue their seemingly inexorable rise, the question for the industry is to what extent it can pass the extra costs onto the consumer.

In North America, airlines have rarely imposed a fuel surcharge as such but instead have offered the rising price of oil as their rationale for raising domestic fares in general. In mid-August, the US industry was trying out its 11th overall increase this year, with $5 each way as the typical increase, says JP Morgan Securities analyst Jamie Baker.

The increases are rarely announced but simply tested in the marketplace, although Air Canada was an exception when its stated that its increases of C$5-$12 were “in response to record high fuel prices”. Travel agent Terry Tipper, who operates the website CheapSeats.com, says: “There’s very little grumbling when the airlines say it’s fuel” because consumers themselves are paying more for gasoline.

Fuel ranks just behind labour among airline costs and typically accounts for between 10% and 20% of expenses, according to the Air Transport Association. US airlines will pay more than $28 billion in fuel costs this year, rising by $6.7 billion from 2004, the group says.

Calyon USA Securities analyst Ray Neidl says that fare increases are probably not enough to make up for the higher costs. He estimates that every dollar increase in the price of crude has the effect of raising operating expenses by $80 million at American; $40 million at Continental; $75 million at Delta; and $50 million at Northwest Airlines.

In Europe, meanwhile, mainline carriers have, with some notable exceptions, managed to pass much of the extra burden onto the passenger through fuel surcharges. Analysts warn that airlines are unlikely to have much more room to manoeuvre with this strategy, however.

In July, before the latest oil price surge, the Association of European Airlines estimated that fuel had jumped from one-eighth of operating expenses two years ago to nearly a quarter. “The bottom line has become so sensitive to swings in fuel price that an extra couple of dollars a barrel shows up immediately in the airline’s share price,” says AEA secretary general, Ulrich Schulte-Strathaus. “Within this scenario of heightened instability, developing the business in an orderly way becomes more and more difficult.”

Not all airlines have gone down the road of fuel surcharges. Low-cost carriers have generally avoided adding surcharges, and have not been slow to have a dig at their mainline rivals for doing so. Some European regions accept surcharges more than others. Both Finnair and SAS are working on their yield management systems to try and adapt their prices to the high cost of fuel, rather than retrieve costs through a surcharge.

In Asia, meanwhile, leading carriers have also been applying surcharges. Cathay Pacific estimates that in the first half of the year its fuel bill jumped by over 70% and accounted for 28% of net operating costs, compared with 22% last year. The carrier estimates that fuel surcharges offset less than half of the fuel price increase.

Source: Airline Business research as of mid-August

COLIN BAKER AND DAVID FIELD/WASHINGTON

Source: Airline Business