The year air­lines an­swered to oil

Gulf Times Business - - AVIATION BUSINESS - By Alex Macheras The au­thor is an avi­a­tion an­a­lyst. Twit­ter han­dle: @AlexInAir

“The volatil­ity of the oil price has been re­ally tremen­dous. It re­mains our ut­most con­cern” Se­bas­tian Mikosz, CEO of Kenya Air­ways said, at the com­pany’s an­nual meet­ing ear­lier this year. Mikosz is not alone — over the last twelve months, the global state of avi­a­tion has been dic­tated and de­ter­mined by oil. It’s wiped off prof­its for some air­lines, while com­pletely killing oth­ers. If weaker, smaller air­lines were able to sur­vive 2017, oil en­sured to de­cide their fate in 2018, es­pe­cially in Europe — home to sev­eral vul­ner­a­ble air­line car­ri­ers. Fuel costs have con­sis­tently topped the list of ex­penses for most of the world’s air­lines.

Brent crude prices have risen over 55% in the past year, with oil re­cently soar­ing to record highs af­ter crude prices hit a four-year high of $82.16 — the high­est level since Novem­ber 2014. As a re­sult, the In­ter­na­tional Air Trans­port As­so­ci­a­tion cut its out­look for air­line prof­itabil­ity for the cur­rent year by 12% from an ear­lier es­ti­mate.

If there’s a com­mon en­emy in the world’s air­lines fi­nan­cial re­sults — it’s specif­i­cally the 2018 oil price. Air­line oper­a­tors have de­clared huge profit plunges, each cit­ing the higher oil price. From the up­scale, such as Sin­ga­pore Air­lines, whose half-year prof­its for the six months to end-Septem­ber fell by 69% to $196mn “mainly due to high fuel price” to the weak, re­gional Bri­tish car­rier, Flybe — who blamed its sub­stan­tial de­val­u­a­tion on ‘con­tin­ued head­winds from higher oil price’.

It’s in­evitable that air­lines have passed, or will have to pass some of the fuel bur­dens onto pas­sen­gers. Amer­i­can Air­lines said the car­rier is man­ag­ing to ab­sorb ris­ing fuel costs for the mo­ment, but it may have to raise prices if those lev­els be­come “the new nor­mal.” Aus­tralian flag car­rier, Qan­tas said its do­mes­tic busi­ness “can con­tinue to di­gest” higher fuel prices, but the same can­not be said for its in­ter­na­tional op­er­a­tions. IndiGo, In­dia’s largest air­line, as well as Cathay Pa­cific, and Malaysia Air­lines will in­tro­duce a fuel sur­charge on all flight tick­ets, thus in­creas­ing the fi­nal for pas­sen­gers. Have any air­lines been ex­empt from this year’s oil woes? Not quite.

In the oil-rich Mid­dle East, state-owned, Emi­rates air­line (of Dubai, UAE) ad­mit “Fuel re­mained the largest com­po­nent of the air­line’s cost, ac­count­ing for 33% op­er­at­ing costs com­pared with 26% in the first six months of last year” while Qatar Air­ways said the air­line may too con­sider a fuel sur­charge on tick­ets, to com­pen­sate for the higher oil price. How­ever, over the past four weeks, a fluc­tu­at­ing oil price has taken a sharp de­cline, with oil dip­ping be­low $50 a bar­rel for the first time in more than a year. Nev­er­the­less, while a fall in crude oil prices may have a pos­i­tive im­pact, the avi­a­tion sec­tor will take at least one or two quar­ters to feel it.

The main source of oil price fluc­tu­a­tions is Opec (Or­gan­i­sa­tion of Pe­tro­leum Ex­port­ing Coun­tries) which con­trols over 40% of global oil sup­plies. Opec in­flu­ences the price of oil by es­tab­lish­ing pro­duc­tion lev­els to ‘meet the global de­mand’ for crude oil. While it in­flu­ences the de­mand by in­creas­ing or de­creas­ing the pro­duc­tion, its con­trol and monopoly on the oil sec­tor have now led to Wash­ing­ton con­sid­er­ing le­gal ac­tion against Opec for ‘con­tin­u­ing to ma­nip­u­late the en­ergy mar­ket’. Ear­lier this week, the State of Qatar an­nounced its with­drawal from the or­gan­i­sa­tion, end­ing its 50+ year par­tic­i­pa­tion.

In Hong Kong, Cathay Pa­cific suf­fered fuel-hedg­ing loses worth $6.45bn due to be­ing locked into con­tracts dur­ing sharp oil price fluc­tu­a­tions this year, mostly trig­gered by Opec.

The world’s air­lines will con­tinue to be the sin­gle fastest-grow­ing user of oil, in­creas­ing con­sump­tion by 2.2% a year on av­er­age, to 2040 — but it’s not just this year’s higher oil price that has stung air­lines — it’s also the sud­den falls. Fol­low­ing a year rocked by oil, In­ter­na­tional Civil Avi­a­tion Or­gan­i­sa­tion (ICAO) wants to achieve car­bon-neu­tral growth in avi­a­tion by 2020 and has urged the rest of the in­dus­try to work harder on sus­tain­able so­lu­tions, which would, in turn, re­lieve air­lines of their on­go­ing oil pur­chas­ing woes. How­ever, the avi­a­tion in­dus­try has been slow in its adop­tion of re­new­able sources, and the lim­ited avail­abil­ity of bio­fu­els be­comes an ex­pense in it­self.

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