The irony of a falling fuel price

THE NEW YEAR started on a promising note, so it seemed. Stock prices moved up, and so too the price of fuel.

 

 

What paradox this is that the past year had been a punishing one both sides of the coin. The soaring fuel price in the first half of the year – from US$95 to US$147 a barrel of crude oil – brought jitters to the world. Analysts were quick to predict the ceiling was nowhere in sight, some of them confidently placing a finger on $250 a barrel by 2009.

 

What then followed might have been good news when the trend reversed and the price of crude oil fell close to $40 a barrel by the end of the year, but that did not bring the much-needed relief in a global economy beset with the woes of a financial meltdown.

 

Few businesses are as affected by fluctuations in the fuel price as the airline industry, considering that fuel consumption can be as high as 30 to 40 per cent of the operating costs. One might already be asking why airfares have not come down in tandem with the falling fuel price, when many airlines had been quick to raise their fares or fuel surcharges when the fuel price rose. 

 

 

 

The truth is that the declining fuel price is not necessarily good news for the airlines. In an industry where fuel hedging is a common practice, many airlines have been caught flying ahead of the rising curve.

 

Cathay Pacific Airways announced losses from hedging fuel contracts that would run through 2011, costing an estimated HK$7.6 billion which only Oct 31 last year was estimated to be HK$2.8 billion. Other airlines affected by the costly gamble include All Nippon Airways, Air China, Air Canada and almost every American carrier from the giants of United Airlines and American Airlines to the smaller carriers such as Alaska Airlines and Southwest Airlines.

 

 

 

Few airlines have reported benefiting from their hedging policies. Among them was British Airways, which recently announced it was cutting the fuel surcharge by one third to reflect the falling fuel price

 

It would follow that the falling fuel price would induce increased air travel. In light of this, the International Air Transport Association (IATA) has revised the loss forecast for the world’s airlines from US$4.1 billion next year to US$2.5 billion. International Civil Aviation Organization (ICAO) council president Roberto Kobeh Gonzalez was also optimistic that the industry could regain profitability as early as this year.

 

Therein lies the irony, when the falling fuel price reflects a strained global economy badly in need of a stimulant to recover. Until the economy gets kicking again, air travel is unlikely to get the boost. And it does not help that many airlines are still holding on to their prices to make up for the fall in revenue.

 

The problems of the lackluster economic climate are compounded by political unrests, terrorism threats and social issues, which have taken a toll on air travel. ICAO has warned that airports could be the next soft targets of terror attacks.

 

Ironically, therefore, a rising fuel price may augur well for the airlines, if not to cushion against the hedging losses but as a signal of an economic recovery. At the very least, airlines will be relieved of the pressure to justify their reluctance to reduce airfares when the fuel price is falling. But if the economy continues to sink and with it, the fall in the demand for seats, even a falling fuel price is not going to help. The airlines may have no choice but to reduce airfares and fuel surcharges (some airlines have already waived fuel surcharges for domestic travel) to stimulate demand.

 

While the glimmer of hope that 2009 brings has some experts prematurely dusting their crystal balls in the belief that they can see clearly now, the New Year’s spike – triggered by the escalating conflict in the Middle East and the dispute between Russia and Ukraine over gas imports – seems shortlived. Soon after, the price of crude oil plunged from US$48 to below US$40 a barrel.

 

Lest we forget, the year that passed has proven us wrong too many times. But for the nagging uncertainty, who knows what will happen next?

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About Dingzi
Writer by passion, with professional expertise in aviation, customer service and creative writing. Aviation veteran, author, editor and management consultant. Besides commentary on business issues and life-interest topics, travel stories and book reviews, genres include fiction, poetry and plays. Nature lover who abhors cruelty of any form to animals, and a tireless traveler. Above all, a dreamer.

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