Carriers in the Asia-Pacific region and Europe are struggling to cope with the surge in oil costs
While they may be in a more healthy state than their North American peers, airlines in Europe and Asia-Pacific are still reeling from the surge in the price of oil.
Fuel prices wrought the havoc anticipated on Asia-Pacific airline bottom lines during the reporting periods ended June 2005. Only four listed carriers saw profits advance. Revenues and passenger traffic was robust at most operators, but none of these elements appear to have done anything for profitability.
Unit costs rose by more than 20% at the airlines facing the most severe reversal in fortunes during the quarter and the blame for this could not all be laid at fuel’s feet. Ill-controlled consolidation (China Southern) and rebranding exercises (Thai Airways and Malaysia Airlines) contributed to the decline, with ill-conceived (ie, non-existent) fuel-hedging policies assisting the profits decline at Korean Air and Asiana Airlines.
Jet fuel surcharges were near to being universal across the industry during the last reporting season. While confirming the robustness of the demand environment (only Thai Airways saw demand decline – and that was Tsunami-related), had they not been included then only a few airlines would have reported profits. With surcharges as high as $65 each way on some long-haul sectors, it cannot be long before some degree of demand elasticity begins to emerge.
This quarter was the second in a row that aggregate earnings for the listed Asia-Pacific airlines sector declined, having pretty much advanced since the effects of SARS subsided in late 2003. The reversals were more widespread this quarter than last and far more deeply felt than before.
Passenger fuel surcharges featured during the entire period (they were first introduced by Air New Zealand and Singapore Airlines in May 2004) and were escalated at most airlines as jet kerosene prices increased. Whilst surcharges may arguably be considered a fare increase in disguise, if this income is excluded yields would have been negative across the board, with a couple of exceptions.
This suggests that discounting of published fares is beginning to emerge – especially at the rear of the aeroplane. When compared with profits, Malaysia Airlines and Thai Airways’ losses would have been even deeper without it, Air New Zealand’s profits would likely not have existed and Cathay Pacific and Singapore Airlines’ results would have been a fraction of their reported size.
Looking ahead, It is probable that movements in surcharges will be pivotal to the September earnings period – as will the extent to which the travelling public begins reacts at their advancing level.
In Europe too, fuel surcharges have been the key weapon in the fight against rising fuel costs, with analysts estimating that as much as 80-90% of the surcharges are sticking, but warning that it is uncertain that further cost increases can be passed onto the consumer. The fact that British Airways increased its long-haul surcharge in September but left untouched its short-haul surcharge is perhaps a signal that carriers are close to the limits where they have to compete against low cost carriers.
While low-cost carriers have avoided surcharges, they have moved into the slipstream left by mainline carriers. Speaking at the World Low-Cost Airlines conference in Amsterdam in September, easyJet’s chief operating officer Ed Winter said that the decision by rival airlines to introduce fuel surcharges had eased the pressure on easyJet to slash its airfares to entice customers.
“We are totally against putting in fuel surcharges but because others are doing it and to the extent they are doing it, it drives up prices in general,” Winter said, adding that easyJet had had a good summer.
COLIN BAKER/LONDON/TIMOTHY ROSS/AUCKLAND
Source: Airline Business