Turbulence ahead for airlines despite oil price drop

Airlines are still in for financial turbulence despite a recent fall in oil prices, with many at risk of posting major losses as the cost of their top input remains historically high.

"If fuel prices remain at a reasonably low and stable level, of course it'll be favorable to operations of the company," Wang Jian, board secretary of China Eastern Airlines, told AFP.

But "despite the recent reduction in oil price, it remains at historically high levels and a significant challenge to the business," said Cathay Pacific Finance Director Martin Murray.

It "relieves the pressure a bit," acknowledged Air France-KLM's Philippe Calavia, finance director at Air France-KLM.

But he noted the Franco-Dutch group has based its financial plans on oil at an average of $98 a barrel this year.

Oil prices are "still above over budget," he said.

The price of oil continued to fall this past week, with Brent North Sea crude for June at $106.91 a barrel in late London afternoon trade, way off the $128.40 it hit on March 1 and the record $147.50 it set in July 2008.

Airlines in Asia and Europe have been struggling with the high price of fuel, the first or second largest cost in their budgets, which has pushed many deep into the red.

Singapore Airlines saw its full-year profit plunge 69 percent year-on-year to $268 million due to high oil prices and global economic uncertainty.

Similarly Hong Kong-based Cathay Pacific saw its 2011 net profit slump 61 percent to $708 million and recently announced a raft of cost-cutting measures in response to high fuel prices.

Australia's biggest airline Qantas, which has raised fares in recent months to partially offset higher fuel costs, said reduced oil prices were not yet helping its bottom line.

"Our fuel bill this year is going be significantly higher than last year, so the outlook is still very challenging as far as we are concerned," a spokesman told AFP.

Jet fuel is Qantas' biggest operational cost and in February the carrier said it had hedged 86 percent of its remaining fuel requirement for the financial year at a worst-case price of $121 per barrel.

Airlines, like many other companies, use financial instruments to protect themselves from possible rises in oil prices. But hedging can also trap them if oil prices fall below expectations.

"The main risk today is to rush to take advantage of current prices, which are still very high if falling, and finding yourself exposed to a loss on your hedges if prices continue to fall," said Air France-KLM's Calavia.

The airline which is looking at a fuel bill some 1.1 billion euros ($1.4 billion) heavier than the 6.4 billion it spent in 2011, has hedged around 60 percent of its second-largest operational cost after wages.

German airline Lufthansa has hedged 76 percent of its fuel needs, and forecasts it will spend 7.5 billion euros this year compared to 6.3 billion in 2011.

Oil prices are now moving back to a level where airlines can make a profit, according to the industry group IATA, which represents 240 companies that carry 84 percent of global traffic.

"Our central forecast in March suggested that if oil averaged $115, then as a whole the industry would still make a small profit of $3 billion," said IATA spokesman Chris Goater.

"But if oil were to spike to an average of $135, then we would see an industry loss of $5.3 billion," he added.

European airlines are also not getting their hopes up too high too quickly as the slide in the euro has been eroding much of the gains in the drop of dollar-priced oil.

And until oil prices stabilise at a lower level airlines such as Cathay Pacific, Lufthansa and Air France-KLM intend to push forward with drastic cost-cutting plans.

Loading...

Editor’s note:Yahoo Philippines encourages responsible comments that add dimension to the discussion. No bashing or hate speech, please. You can express your opinion without slamming others or making derogatory remarks.

  • Developers prepare for new rules and regulations
    Developers prepare for new rules and regulations

    Known as the "Subdivision and Condominium Buyers' Protective Decree," Presidential Decree No. 957 issued two sets of revised implementing rules and regulations (IRRs) earlier in 2015. A bill initiated by former President Ferdinand Marcos in 1976, the decree and its most recent amendments were designed to "protect buyers from fraudulent and unscrupulous subdivision and condominium sellers, operators and developers," according to the explanatory note that accompanied the bill in its senate …

  • Pinoys dance for Earth Hour
    Pinoys dance for Earth Hour

    The Philippines once again displayed its support Saturday night for the worldwide observance of Earth Hour by hosting a dance party after turning the lights off from 8:30 to 9:30 p.m. to save energy and make a statement on various environmental issues. …

  • Phl offers Sabah to win Malaysia’s support for UN case vs China
    Phl offers Sabah to win Malaysia’s support for UN case vs China

    The Philippines has offered to downgrade its claim on Sabah in exchange for Malaysia’s support for its case against China before the United Nations. The quid pro quo was contained in a note verbale the Department of Foreign Affairs (DFA) handed to a representative of the Malaysian embassy last week, a week after the visit of Malaysian Defense Minister Dato  Seri Hishammuddin Tun Hussein. The note verbale, a copy of which was obtained by VERA Files, referred to the May 6, 2009 joint submission …

  • Maysak to enter Phl Wednesday
    Maysak to enter Phl Wednesday

    A typhoon with international name Maysak is expected to enter the Philippine area of responsibility (PAR) on Wednesday and bring rains over Northern Luzon by weekend, the state weather bureau said yesterday. Aldczar Aurelio, weather forecaster of the Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA), said the typhoon was 2,810 kilometers east of Mindanao as of 10 a.m. yesterday. “This typhoon is still too far to affect any part of the country,” the weather …

  • Nonviolent disciplining of kids pushed

    Child rights advocates called on senators to pass and strongly endorse a law that will institutionalize positive and nonviolent methods of disciplining children.The Child Rights Network (CRN), Plan International Philippines (PIP), Philippine Legislators’ Committee on Population and Development (PLPCD), and Lihok Pilipinas Foundation led the call for the enactment of the Positive Discipline Bill.Several Quezon City Council members led by Majority Floor Leader Jesus Manuel Suntay, Victor Ferrer …

  • Method to their madness

    [caption id="attachment_256768" align="alignright" width="212"] Illustration by Rod Cañalita[/caption] EMMANUEL PORTUGAL Country Manager for the Philippines, VMware I look after the garden. I’d like to think that I have a green thumb—no plants have died so far! The ones I like now that I planted a few months ago is the Blue Iris. Like the town in the movie, my Blue Iris shows up in the morning and only appears for one day. …

  • JGFP Summer Tour on today

    The summer tour for local junior golfers kicks off with the holding of the ICTSI-JGFP Baguio Junior Open today and tomorrow at the treacherous Baguio Country Club course in Baguio.Sixty players aged 6 to 17 years old are entered in the 36-hole tourney serving as the opening leg of the summer circuit organized by the Junior Golf Foundation of the Philippines with the International Container Terminal Services, Inc. Foundation as main sponsor. ... …

  • PH now market ready to absorb infra bonds

    The Philippine market is now ready to absorb infrastructure bonds that will be issued by private companies amid a growing pipeline of infra-related projects under the government’s Public-Private Partnership (PPP) program. President Benigno Aquino III last week said the government is still committed to spend more on the country’s infrastructure, with 16 PPP projects currently on the pipeline and nine that have already been awarded. Over the years, some of the country’s biggest infrastructure …

POLL

Should Aquino be held accountable over the Mamasapano operations?

Loading...
Poll Choice Options