Mon, May 28, 2012 - Page 10 News List

Airlines face turbulence despite oil price plunge

OPENING SKIES:Lower oil prices will mean bigger profits for airlines, but they must adjust their hedging strategies to deal with future oil market volatility

AFP, PARIS

A picture taken on Nov. 27, 2006, shows a model plane of Air France-KLM low-cost airlines Transavia.com, at Roissy Charles de Gaule Airport, near Paris. On Thursday, Air France announced downsizing plans.

Photo: AFP

Airlines are still in for financial turbulence despite a recent fall in oil prices, with many at risk of posting major losses as the cost of their top input remains historically high.

“If fuel prices remain at a reasonably low and stable level, of course it’ll be favorable to operations of the company,” said Wang Jian (王建), board secretary of China Eastern Airlines.

However, “despite the recent reduction in oil price, it remains at historically high levels and a significant challenge to the business,” Cathay Pacific finance director Martin Murray said.

It “relieves the pressure a bit,” Air France-KLM finance director Philippe Calavia said, but he noted the Franco-Dutch group has based its financial plans on oil at an average of US$98 a barrel this year.

Oil prices are “still above over budget,” he said.

The price of oil continued to fall this past week, with Brent North Sea crude for June at US$106.91 a barrel in late London afternoon trade, way off the US$128.40 it hit on March 1 and the record US$147.50 it set in July 2008.

BIGGEST COST

Airlines in Asia and Europe have been struggling with the high price of fuel, the first or second-largest cost in their budgets, which has pushed many deep into the red.

Singapore Airlines saw its full-year profit plunge 69 percent year-on-year to US$268 million due to high oil prices and global economic uncertainty.

Similarly Hong Kong-based Cathay Pacific saw its net profit slump 61 percent to US$708 million last year and recently announced a raft of cost-cutting measures in response to high fuel prices.

Australia’s biggest airline Qantas, which has raised fares in recent months to partially offset higher fuel costs, said reduced oil prices were not yet helping its bottom line.

“Our fuel bill this year is going be significantly higher than last year, so the outlook is still very challenging as far as we are concerned,” a spokesman said.

Jet fuel is Qantas’ biggest operational cost and in February the carrier said it had hedged 86 percent of its remaining fuel requirement for the financial year at a worst-case price of US$121 per barrel.

HEDGING

Airlines, like many other companies, use financial instruments to protect themselves from possible rises in oil prices, but hedging can also trap them if oil prices fall below expectations.

“The main risk today is to rush to take advantage of current prices, which are still very high if falling, and finding yourself exposed to a loss on your hedges if prices continue to fall,” Calavia said.

The airline, which is looking at a fuel bill about 1.1 billion euros (US$1.4 billion) heavier than the 6.4 billion euros it spent last year, has hedged around 60 percent of its second-largest operational cost after wages.

PROFIT MARGIN

Oil prices are now moving back to a level where airlines can make a profit, according to the industry group IATA, which represents 240 companies that carry 84 percent of global traffic.

“Our central forecast in March suggested that if oil averaged US$115, then as a whole the industry would still make a small profit of US$3 billion,” IATA spokesman Chris Goater said. “But if oil were to spike to an average of US$135, then we would see an industry loss of US$5.3 billion.”

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