Fuel surcharges likely in 2011

Rising crude oil prices are again putting pressure on airlines.

Another period of uncertainty looms in the airline industry in 2011 as resurgent oil prices push fuel costs back up towards 2008 levels. Crude reached a two-year high of more than $90 a barrel at the end of 2010 before falling back slightly. Today it is $89.91, but with a one-year forecast of $103 per barrel, according to the trading website Oil-Price.net. That raises the prospect of crude oil pushing past the psychologically important $100 a barrel in the near future, making prospective price hedging a priority for the world’s airlines.

It also raises the likelihood of airlines imposing fuel surcharges. “Every dollar that fuel rises erodes their earnings,” a Standard & Poor’s equity analyst in New York comments. “It’s not good news to see fuel prices back up. Once we start approaching $100 a barrel, you’ll start to see fuel surcharges come back.” According to a report by Goldman Sachs Group Inc., the price will top $100 by the second half of 2011. Fuel represents 25-30% of airlines’ total expenses. “At $100 plus oil in 2011, they have to price that on fares or surcharges or both,” a UBS Securities LLC analyst told Bloomberg.

“The airlines are supposed to have several years of profitability to mend their balance sheets after this last downturn, and oil is eating into that.” In the USA, every sustained $5 annual increase in the price of crude means that airlines have to raise round-trip fares by $7 in order to offset the cost on domestic operations, states a report by JPMorgan Chase. Gary Kelly, CEO of the US airline Southwest Airlines, said in a speech in December that volatility in fuel prices is the industry’s number-one challenge. “All you have to do is look back at the last decade to see what kind of havoc it wreaks on our industry. It is the single biggest threat to aviation,” he said.

Bloomberg

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