Volatility in oil prices poses a risk for airline users as airline cost is likely to trigger an increase in flight fares, according to the Chief Executive Officer of the International Air Transport Association (IATA), Alexandre de Juniac in Singapore on Monday.
Speaking at the sidelines of a conference ahead of the Singapore Airshow, the CEO said “oil cost is not so much a competitive differentiator for an airline. It puts pressure on costs and it is more a fare inflation trigger.”
Despite the agreement among airlines that an oil price of around 65 to 70 dollars remained “acceptable” according to Juniac, the increase in oil price is proving financially damaging for airline operators as it has become more difficult to keep pace with the hike in oil price.
Vietnam Airlines had budgeted for an average jet fuel price of 75 dollars a barrel this year, but got disappointed as oil price has already gone past 80 dollars. However, fuel surcharges are being applied in a move that would push up fares that could gradually lead to lower demand from passengers, Vietnam Airlines JSC said.
Facing the similar situation, Irish low-cost carrier Ryanair, who had previous projected increased oil prices short-haul airfares in Europe come 2019, is not left out of the situation.
Why You Should Be Concerned
In almost two decades, airline fuel costs have ranged from 68 cents to $3.69 per gallon, with significant increase of 52% percent in 2017 to around 68 dollars a barrel.
Fuel prices accounts for over 20% percent of an airline’s costs, and higher fuel prices eat into airline profit margins, not just because of the absolute price increase but also the rate of the increase.
China’s Okay Airways President, Li Zongling, noted that an estimated increase of 20% in fuel cost impacted the airline’s profit in 2017, compared to that of the previous year.
“Earnings fell by around five per cent due to the higher oil price,” Zongling added.
With the industry’s contributions of 58 million jobs and $2.4 trillion in global GDP and a projected increase to 105 million jobs and $6 trillion in global GDP come 2034 according to IATA, the aviation industry is an important contributor towards economic development as it not only increase world trade activity by enabling faster and easier movement of passengers and goods, but also provides jobs to millions of people.
The Projected fuel price spike means airlines must adjust their budgets accordingly, and more funding funneled toward gas would leave less available for overall growth.
Expensive operation costs implies increase in traveling cost, which in turn affects the cost of daily necessities rise, extras, like sacrificed vacations involving air travel. Thus, airlines may end up paying more for fuel with fewer passengers per flight.
“Especially for passengers traveling for tourist purposes when they see it (fares) past a certain level they say no,” affirmed Vietnam Airlines CEO Duong Tri Tranh.
At this point, it is important to highlight that oil refining affects the cost of Jet fuel compared to that of a standard barrel of oil. In order to meet fuel demand, airlines will have to cut cost as much as they can, and that would include taking thousands of people off the job as airlines would cut labor costs to the bone.
Though it may seem not to have an immediate effect on the economy, the damage of fuel price increase sticks around for a long period of time, as seen in the cases of oil producing nations like Venezuela, Nigeria, Ecuador and Brazil, who faced economic hardships for years.