Airlines reluctant to cut fares

Airlines reluctant to cut fares

Although oil prices have dropped by half in recent months and continue to nosedive, don't expect to see that being translated into lower airfares, at least any time soon.

A passenger looks at aeroplanes parked at Don Mueang airport in Bangkok. Despite the sharp fall in oil prices, forward fuel-buying practices make airlines reluctant to lower airfares. PANUMAS SANGUANWONG

But even if ticket prices were cut, probably in the second quarter, the fall would be marginal and a far cry from the current scale of oil price reduction.

Most airlines so far have been very reluctant to start passing on any savings made on plummeting oil prices by cutting ticket prices.

Many, caught off-guard by the steady and wide-margin free fall in fuel costs, are still paying pre-plunge prices for forward volumes resulting from hedging, say airline executives.

To protect themselves against wild fluctuations and upside price trends, which have been the case in the past, they hedged relatively heavily.

For instance, flag carrier Thai Airways International (THAI) reportedly has as much as 70% of its jet fuel requirement hedged at about US$90 a barrel, compared with $66.35 a barrel quoted on Singapore's spot market on Tuesday.

The extended period of jet fuel hedging, normally between three to six months, has also deprived airlines of the immediate benefits from the soft fuel prices, the lowest in more than five years.

Those which have hedged less, 30-40% in the case of Thai AirAsia and Nok Air, are in a better position to reap the benefits of lower fuel prices sooner than loss-ridden THAI.

But as to exactly when and by how much ticket prices will be reduced is anyone's guess.

Consumers feel cheated as lower fuel costs have scaled back one of the airlines' major operating costs to just over 20% from around 35% in the past.

Veteran airline executive Wallop Bhukkanasut pointed out that several airlines are still stuck with a relatively high volume of inventory hedged at high prices and need time to exhaust those volumes before thinking about passing on the benefits.

They also want to take advantage of the unprecedented low fuel prices to shore up their balance sheets covered with red ink, said Mr Wallop, vice-president for Southeast Asia and Australasia for India's Jet Airways.

Thai AirAsia chief executive Tassapon Bijleveld insisted that it remains unclear if the plunge in fuel prices would be consistent to have a transparent effect on airlines' costs.

"We still have hedged oil in place. We will wait until February to see if the drop is sustainable enough to enable us to cut flying costs in terms of a reduction in the fuel surcharge," he said.

Tony Tyler, secretary-general of the International Air Transport Association (IATA), confirmed that the impact of lower fuel prices will be realised with a time lag due to forward fuel-buying practices.

IATA chief economist Brian Pearce said it would be another six months or so before airlines see lower fuel costs, and at that point consumers are likely to see a fall in travel costs.

IATA, which represents 240 airlines or 84% of total air traffic, foresees airlines cutting the average ticket price by 5% in 2015, excluding taxes and fuel surcharges through which cheaper fuel costs would be phased in.

While the spot price of benchmark Brent slipped to a mere $51.10 a barrel on Tuesday, IATA continues to uphold its projection of benchmark crude at $85 a barrel in 2015 — on the basis that the fall in prices continues and the consensus of oil forecasters.

More relevant to airlines, it sees the likelihood of jet fuel price averaging $99.9 a barrel this year.

Based on that projection, the association expects airlines to spend $192 billion on fuel this year, down from $204 billion last year.

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