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Thu 8 Jan 2015 04:58 PM

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Demanding a fare deal on oil

Why aren’t air travel costs following oil prices and heading downwards, asks Courtney Trenwith

Demanding a fare deal on oil

Qatar Airways has joined the leading pack of international carriers to announce they will cut their fuel surcharges amid a halving of the oil price. So when will the others follow suit?

The tax was imposed at the beginning of the century when oil costs began to significantly rise, so it seems only fair it is cut when costs decline.

Adding salt to the wound, the International Air Transport Association (IATA), representing 240 airlines including the largest international carriers, expects industry profits to increase by 26 percent this year, to $25bn (not adjusted for inflation).

Airlines also are embarking on the highest spending spree in the history of aviation, much of it led by Gulf carriers.

The IATA forecast is based on an average price of oil at $85 a barrel; the price fell to below $53 this week, leaving room for profits to climb even higher. 

“There’s no doubt that the recent fall in the oil price is a relief for airlines,” IATA CEO Tony Tyler said in December, hinting there could be some respite in store for flyers.

But so far the two state-backed Chinese carriers, Japan Airlines and Qatar Airways are the only ones to announce a partial drop in the surcharge.

Even they have said they will not remove the tax altogether.

"Please keep in mind that when the fuel price rose to $100 a barrel and over, the airline was in the negative territory as far as its finance was concerned," Al Baker said on January 7.

The rest of the industry argues their fuel is hedged – bought months in advance at negotiated prices to avoid potentially worse volatile fluctuations – and no one knows where the oil price will moderate, or when, thus making any reduction in the surcharge risky if prices significantly rebound.

Other economic factors, such as the rise in the US dollar, regional conflict and low margins, also have off-set any fuel savings, they say.

For some, the surcharge never fully covered the cost of fuel in the first place. But why should it? Fuel is a part of an airline’s operating costs as much as paper is part of a printers’ and we don’t expect to pay extra for the paper on top of the printing.

There is another reason airlines are so reluctant to reduce surcharges: frequent flyers usually still have to pay taxes and surcharges, so incorporating such costs into bare tickets would cost airlines millions.

But on the side of airlines, their net profits are not exactly outrageous at an average 3.2 percent (although Gulf carriers are far higher), leaving little room for price cutting.

There also is little incentive: demand is high. Majority of airlines, including Emirates, Qatar Airways, and Etihad, are consistently reporting record passenger numbers – often in double digits.

“In a strong demand environment, we don’t plan to go off and just proactively cut fares,” American Airlines president Scott Kirby told investors recently.

CEO of another American airline, Southwest, Gary Kelly added that lowering fares now, only to hike them again if oil prices rise, “would be absolutely the worst thing that we could do”.

University of Sydney senior lecturer in aviation management Rico Merkert told the Australian Financial Review on January 7 the airlines likely to move first are those that have not hedged their fuel prices. But that could eventually force competitors to follow suit, causing a domino effect.

At the end of the day, it will come down to competition and demand. Unless consumers stop buying tickets, airlines will have little incentive to make them cheaper.

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