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Airfares To Go Up As Oil Prices Increase



The rise in the oil price is putting the squeeze on airline costs and is likely to lead to a rise in air fares, industry executives had said.

International Air Transport Association Chief Executive Officer Alexandre de Juniac said in Singapore on Monday that he believed there was a consensus among airlines that an oil price of around 65 to 70 dollars remained “acceptable” but not above that.

“It is not so much a competitive differentiator for an airline. It puts pressure on costs and it is more a fare inflation trigger,” he told reporters on the sidelines of a conference ahead of the Singapore Airshow.

The oil price, which typically accounts for around 30 per cent of an airline’s costs, has risen 52 per cent since June 2017 to around 68 dollars a barrel.

However, airlines said the higher oil price was proving financially damaging because fare increases had so far failed to keep pace with the oil price rise.

“Last year, we estimated that our fuel costs rose 20 per cent compared to 2016 which had an impact on our profit,” said Li Zongling, the President of China’s Okay Airways.

He estimated that earnings fell by around five per cent due to the higher oil price.

Vietnam Airlines JSC, said fuel surcharges were now being applied in a move that would push up fares but could gradually lead to lower demand from passengers.

“Especially for passengers travelling for tourist purposes when they see it (fares) past a certain level they say no,” Vietnam Airlines CEO Duong Tri Tranh said.

The carrier had budgeted for an average jet fuel price of 75 dollars a barrel this year but it has already gone past 80 dollars, he said.

Irish low-cost carrier Ryanair said earlier that it expected higher oil prices to push up short-haul airfares in Europe, but not until 2019.

Jet fuel is more expensive than a standard barrel of oil due to refining costs.

Meanwhile oil prices on Monday extended declines from the end of last week amid a wider market sell off and a stronger dollar, with Brent crude falling to its lowest in nearly a month..

Brent was down 57 cents, or 0.8 percent, at $68.01 a barrel at 0716 GMT, after falling 1.5 percent on Friday. Brent’s weekly drop was 2.75 percent last week.

U.S. West Texas Intermediate (WTI) crude declined 47 cents to $64.98 a barrel, after dropping 0.5 percent in the previous session. WTI fell by 1 percent during the last week.

“Oil is caught up in this general risk-off move, not helped at the margins by a little bit of strength in the U.S. dollar,” said Ric Spooner, chief market analyst at CMC Markets in Sydney.

Asian shares were down the most in more than a year on Monday as fears of resurgent inflation battered bonds.

Wall Street dropped last week from record highs as inflation concerns sparked speculation that central banks globally might be forced to tighten policy more aggressively.

The three major U.S. indexes capped their worst weekly losses in two years, after closing at record highs the previous week.

“The size of the move in U.S. equities doesn’t always mean this, but usually after a move like that and particularly when it follows such a long uptrend, there is follow through selling,” Spooner said.



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