The year airlines answered to oil
“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.