Global instability rocks airlines

Fuel surcharges continue

Political instability, rising oil costs and the Japanese earthquake have led to a 10 per cent drop in airline share prices in the first quarter.

According to statistical reports released by the International Air Transport Association, jet fuel prices have surged to US$134 a barrel, which is three times the cost in early 2009.

The prices have risen in part due to unrest in the Middle East, which provided what the association called a supply shock, taking costs higher than

$100 a barrel. The shutdown of refinery capacity in Japan following the earthquake of 11 March also affected supply.

Fuel surcharges

One effect of this is that fuel surcharges continue to be implemented by airlines worldwide.

The charges have been implemented by the industry for around 40 years based on a range of factors including exceptionally high fuel prices or market volatility, explained Tim Smith of American Airlines.

“Fuel surcharges have largely been on international routes, partly because many of those flights are long-haul and would tend to incur higher spending on fuel purchases at any fuel price. Other factors beyond fuel prices include: length of the flight, competitive factors with other airlines which also have fuel surcharges, government rules and regulations on the subject in many countries plus price of fuel of course.

“Certainly the very high fuel prices and run-up over the past months are of great concern and not just from a fuel surcharge standpoint. Fuel prices are definitely among the factors that drive fuel surcharges, but note also that there are several other factors at play. And that point is driven home by the fact that some fuel surcharges in some other markets have actually declined recently – obviously that was not driven by fuel, but by competitive or government factors,” said Mr. Smith.

Willie Walsh, chief executive of the International Airlines group, warned that continued volatility in the market will lead to fuel surcharges across the industry.

Mr. Walsh said that the group – which comprises the merged British Airways and Iberia – would adjust fuel surcharge if they felt it necessary.

Tour operators Thomas Cook and First Choice also said they were imposing fuel surcharges for package tours leaving the UK.

Capacity exceeds demand

Passenger yields have risen by 7 per cent between September 2010 and February 2011, but this is offset by the 70 per cent rise in jet kerosene during the same period and also an increase in capacity which is in excess of passenger demand.

“For much of 2010 airlines were able to recoup rising fuel costs. The most recent surge has clearly not been recouped.

The rise in fuel costs has been very large but falling load factors may be undermining the ability of airlines to recoup these costs,” read the International Air Transport Association report.

The association predicted that airlines may reduce capacity later in 2011 to adjust.