A conscionable call as oil price plummets: Will airlines reduce airfares?

AS the oil price plummets – some 55 per cent since June last year – the question topmost in the mind of the consumer must be: Will airlines reduce airfares?

Many of them have chosen to be silent on the subject, the excuse being that the historical volatility of the market is such that the trend can turn any time. But it has taken a while, and long enough for some conviction from the airlines, now that analysts are convinced that the cost of fuel is likely to stay low for at least another year.

Travellers on American carriers can stop wishing to share in the bounty, even as US carriers are reporting hefty savings as a consequence. Southwest Airlines estimated it would save US$1.7 billion on fuel in the current year, and Delta Air Lines more than US$2.0 billion. Other airlines that include Untied Airlines and Alaska Airlines are forecasting similar cost reductions. But, say the airlines, fare reduction is not on the card. Instead, shareholders will reap the benefits while the airlines themselves see this as a well deserved windfall and respite to recoup past losses and pare down debts.

Courtesy Getty Images

Courtesy Getty Images

United Airlines spokesperson Megan McCarthy delivered the cold reality of the business when she said: “It has been our position all along that fares are not cost-driven. They are demand-driven.”

That, we all know, is the simple economics of the law of supply and demand. So consumers have themselves to blame. Airlines are enjoying near-full loads that there is no incentive for them to want to lower the fare. In Europe, even budget carriers such as easyJet and Ryanair are looking forward to even higher profits from not only savings on fuel costs but also higher fares. So McCarthy was darn right there. But airlines too have learnt to make the formula work better for them, ceteris paribus, as they reduce capacity particularly in the US with merged operations to hold up demand and maintain airfares.

The consumer’s best hope lies in competition as how it should work in the liberal world, but with consolidation which has seen the merger of big entities in the US, raising questions about the assumed competition itself. Today four airline companies control more than 80 per cent of the US market. Little wonder how US carriers have collectively signalled that airfares will not fall in response to the falling fuel cost.

Where competition does not work, the consumer can hope that some conscionable authority will be able to address the fair fare issue. On that second score, you might fault McCarthy for turning a blind eye, but United, like any other, would contend with some validity that it cannot be both operator and watchdog. Company with conscience is a preacher’s prerogative, more idealistic than operative.

Still, the likes of United may be reminded that back in the days not too long ago when the fuel price reached giddy heights, airlines were raising fuel surcharges as many as four times within a year. Strange as it sounds, they have always maintained that the surcharge is not part of the fare, but not as far as the consumer is concerned. Even so, the corollary must apply as the fuel price dips. No lesser a person than Toby Tyler, director general of the International Air Transport Association (Iata), has said that airline fuel surcharges should begin falling as the drop in oil price works its way through the aviation fuel system. Tyler said: “In many cases, airlines operates now with a basic fare and a fuel surcharge of some kind and the fuel surcharge in many airlines is directly linked to the price they’re paying for fuel.”

Courtesy Airbus

Courtesy Airbus

But it looks like it is not happening quite as quickly as Mr Tyler was convinced that it would when he said in October last year: “You’ll see the fuel surcharge very quickly come down.” Still, better late than never. Better somewhere else if not in the United States. Japan Airlines (JAL) announced lower fuel surcharges for international flights from February 1, recognizing the genesis of introducing such levies back in February 2005 in response to rises in the cost of fuel. Now that is one conscionable airline. JAL said it would revise the surcharge, whether upward or downward, if the fuel price fluctuates further. Fair enough. American and other carriers waiting on the sideline, take note.

Qatar Airlines has also announced it will reduce the fuel surcharge although it has not committed to a date for implementation.

Courtesy flyertalk

Courtesy flyertalk

Australian airlines are among the first to drop airfares in response to the falling oil price. Two forces are at work: competition and the authority. Nowhere else in the world is there more bitter rivalry than that between the two Australian carriers of Qantas and Virgin Australia. Virgin took the lead, and Qantas followed suit. Virgin said it would not get rid of the fuel surcharge altogether, but incorporate it into the fares; however it is packaged, the bottom line should see a reduction. Virgin said the “reductions reflect the benefits of the decline in global oil prices” following monitoring over recent months and “in anticipation that fuel costs will continue to remain at lower levels than the record highs seen in recent years.”

At the same time, the Australian government is putting pressure on the airlines to respond to the drop in fuel costs. Rod Sims, chairman of the Australian Competition and Consumer Commission (ACCC) said: “It is not against the law to introduce a surcharge – what is against the law is to mislead customers.” The ACCC announced it was investigating the matter. In a statement that it released, it said: “The ACCC has confirmed that it is considering whether representations made by airlines imposing fuel surcharges, following the fall in wholesale aviation fuel prices, are misleading. Under the Competition and Consumer Act 2010 businesses must not make misleading, deceptive or false representations about the price of goods or services. This includes when making representations about the reasons for rising fuel costs.”

In this connection, Qantas said: “The bottom line for consumers is that Qantas fares already in the market are some of the cheapest in years. Fuel surcharges are already included in the advertised price and those fares remain extremely competitive.”

The issue is not about the fares already being the cheapest in the market but rather whether they should be even cheaper as a result of lower fuel costs that have saved the airlines millions to billions of dollars.

Meantime the British government is studying the need for intervention. British Airways circumvents the issue with no clear commitment, saying it has launched several sale initiatives. Virgin Atlantic said it has reduced the fuel surcharge before last Christmas and will “continue to monitor the situation and fuel surcharges under review to make them as affordable as possible.”

Courtesy Delta Airlines

Courtesy Delta Airlines

It is a world of ironies. The consumer may as well confront the hard truths about the market. The door does not always swing both ways. As the global economy improves, the demand for seats picks up. And when demand exceeds supply, the game belongs to the airlines so much so that Delta CEO Richard Anderson has suggested to passengers who are looking at reduced fares to “shop around”. He said: “The marketplace is incredibly competitive, and there are always differences in fares.” The consumer can only hope that competition is well and alive without the need for state intervention. If Anderson had come across as being somewhat arrogant, he probably knew he could afford it. But heed his advice anyway.

This article was first published in Aspire Aviation.

Finally, SIA lets Virgin go

virgin-plane

Courtesy Virgin Atlantic

FINALLY, Singapore Airlines (SIA) is letting go of Virgin Atlantic. Or, shall we say, to be rid of it as for some years now the Singapore flag carrier, disappointed with the performance of its shareholding, has expressed its intention to divest the stake. (See Singapore Airlines in discussion to sell Virgin stake to Delta, Dec 4, 2012)

American carrier Delta Airlines has sealed a deal to purchase the 49-per-cent stake that SIA holds in Virgin for £224m (US$360m)… SIA bought the stake in 1999 for £600m (US$965m). Now, indeed, at that price, it tells of a wait that has been too long. It is said that SIA is selling the stake to focus on increased competition at home. Some media has reported SIA’s preoccupation to grow its new budget subsidiary Scoot. Not quite the kind of retreat you expect of an airline that has successfully spread its wings far and wide; if it is so, that’s another story.

However, it is good news for Delta, as a way to increase its trans-Atlantic presence to “overcome slot constraints” at London Heathrow.  Delta chief Richard Anderson said: “Our new partnership with Virgin Atlantic will strengthen both airlines and provide a more effective competitor between North America and the UK, particularly on the New York-London route.”

Together, Virgin and Delta will offer 31 peak-day round trips between North America and the UK in direct competition with the British Airways/American Airlines alliance.

Sir Richard hailed the development as “the start of a new era of expansion, financial growth and many opportunities for our customers and our business.”

The next question to ask is whether Delta will stop there, as there had been rumours that the American carrier may co-opt European partners Air France-KLM to acquire some of the remaining 51-per-cent stake still owned by Sir Richard – the subject that had sparked a spat between Sir Richard and rival British Airways chief Willie Walsh, who allegedly suggested that the Virgin brand might not be around in five years. (See Is Virgin Atlantic on the verge of extinction? Dec 11, 2012).

Delta Airlines buys oil refinery

SAVE on fuel costs, buy a refinery. That’s what Delta Airlines is doing when it announced it had purchased an oil refinery near Philadelphia which would serve its operations at JFK, LaGuardia and other East Coast airports.

Fuel costs are considered an airline’s top expense, making up about 40 per cent of a full-service airline’s bill. In the case of Delta, the cost was on fuel amounted to US$12 billion last year. The investment, according to Delta CEO Richard Anderson, would save the company US$100 million a year over five years.

Will this give Delta an edge in the competition? At less than one per cent in savings, some analysts do not believe it will make much of a difference. But it can provide not only some cushion for the increasing volatility of the fuel price but also a steady supply of fuel in times of uncertainty.

Vertical integration in the supply chain is not a new thing. Consider how the Fairmont Waterfront Hotel in Vancouver, Canada grows its own herbs and rears bees for honey for use in its kitchen. It may have started as a “green” initiative, but its harvest of honey is now sold as a product on the retail shelf. In Singapore, airline caterer SATS Catering has invested in a supply company that provides it with raw products for its kitchen.

However, other airlines are unlikely to consider the Delta initiative. Besides, Delta is not the first airline to enter the oil business. American Airlines bought a couple of oil exploration and development companies in the late 1970s, only to dispose of them later. There might be a fine shade of difference there between potential and actual supply, but still, it looks like a different ball game. Airlines may find it more manageable to adjust fares through the fuel surcharge mechanism.

As for Delta customers who are expecting lower fares, this is likely to be a far call for now. Delta’s object is more likely bottom-line preservation than passing on savings.