Once bitten, twice prepared

YET again, in just a little over three months since December, Singapore Airlines (SIA) raised its fuel surcharge thrice. Qantas did it twice in as many months, following in the footstep of British Airways (BA). Most other airlines had already jumped on the bandwagon.

By all indications, the upward trend is likely to persist as the continuing unrest in Libya and neighboring Middle-East countries threatens to further escalate the price of oil. And while analysts re-paint a gloomy forecast following the catastrophe in Japan wrought by the recent earthquake and tsunami, the irony is that a fall in demand for seats this time round may not necessarily trigger a fall in the fare.

Not just that the airlines are better prepared after the deleterious blow in 2008 when the oil price breached US$150 per barrel before plummeting to US$34 per barrel, though there definitely have been lessons learnt.

One, before Libya, many of the major airlines reported better-than-expected profits in 2010 as the world economy recovers. Cathay Pacific Airways for one almost tripled net earnings to US$1.80 billion (HK$14.05 billion). Qantas posted a four-fold increase in half-year net profits to US$247 million (A$241 million). SIA reported an operating profit of S$380 million in the first six months against a loss of US$339 million (S$428 million) the previous year, and expected the profitability to hold up for the full year in spite of the uncertainties of the oil price.

Hence, airlines are likely to be buoyed by the momentum of the current economic recovery, even if it should slow down. Reported healthy forward booking helps to cushion the latest bout as airlines tread cautiously and make the necessary adjustments. It is an opportune time to raise the fuel surcharge, if not the base fare, to add to the cushion.

Two, note how swiftly the airlines responded to the current squeeze on the fuel price. The lesson is to act before it is too late. And so long as the world is not tumbling backward headlong into the erstwhile long-drawn financial meltdown, when air travel was drastically curtailed, most of the airlines will be able to get by with raising the fuel surcharge, if not the base fare as well. The Japanese crisis is likely to be short-term as Japan will bounce back quicker than anticipated. Besides, the specific impact is more regional than global.

Three, in the yet-to-be-forgotten global financial meltdown, the airlines were saddled with overcapacity and the reduced market for air travel took a toll on the competition. Those that have successfully crawled back into profitability are leaner today, and with a second oil crisis looming and for those airlines that are also impacted by the Japanese crisis, they are likely to keep a lid on capacity growth, adjust schedules to match demand and be circumspect about putting back erstwhile frills so as to contain costs and keep the fare up. Growing businesses and pent-up demand for leisure travel are likely to survive incremental fuel and other surcharges.

The situations then and now are not quite the same, and air travelers, more than the airlines, are likely to be the ones to bear the brunt of today’s crunch, at least in the near term.

Four, reconstruction of Japan will add to the squeeze on the demand for fuel. This provides yet another reason for airlines to up the fuel surcharge – legitimately, it would appear. Ironically, as the spending power of air travellers goes up, the easier it is for airlines to implement add-ons.

Five, Opec nations are rallying to stabilize the oil price. Already the market is showing signs of easing. Saudi oil minister Ali Al-Naimi said: “Saudi Arabia will continue to reliably meet the world’s petroleum needs.”

Six, in the last recession, airlines were dealt a double whammy of soaring fuel price and hedging losses. Airlines will continue to hedge as part of the business, but they have become wiser about making knee-jerk decisions.

Seven, do not ignore the power of the PR machinery of industry watchdog International Air Transport Association (Iata) that warns against possible collapse of the industry that the world can ill afford if prevailing conditions are not made supportive, that forestalls additional levies and operating restrictions by governments and authorities that may add to the financial woes of the airlines, and that pre-empts and cleverly softens public reaction to surcharge and fare increases.

It is the cry of the underdog and the consumer is frequently being reminded of the millions an airline would incur with every dollar increase in the price of oil, that by comparison the increase in the fuel surcharge is paltry. So too are we told the surcharge can never recover the full impact of the fuel price. Air travelers should be grateful to know their journeys have been subsidised.

Iata chief Giovanni Bisignani warned that the industry is “balancing on a knife’s edge.” Yet the last word may belong to Iran’s Opec minister Mohammad Ali Khatibi when he told the Reuters news agency, summing up the situation as being “psychological.”

The airline industry is an unwieldy animal. The real impact of any change in the environment comes lately, and by then the dark clouds could have dissipated. But one never quite knows for sure as the world becomes increasingly unpredictable. However, the message to air travelers is clear: brace yourself for more rounds of the fuel surcharge increase.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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