As price of jet fuel soars, Asian airline profits crash
As price of jet fuel soars, Asian airline profits crash
SINGAPORE (Reuters): Asian airline profits will be hit by
higher jet fuel prices even as passenger load factors rise with
the region's economic recovery, industry sources said on
Wednesday.
Singapore Airlines said on Tuesday its June load factor rose
4.7 points to 72.9 percent from a year earlier, while Malaysian
Airlines said in late July its load factor had risen to 68
percent from a 50-percent rate during the Asian crisis.
But Asian jet fuel prices have rocketed up in the last four
months and will eat into revenue from better loads, though the
effects on airlines will vary and a few may even benefit as the
impact works its way through the industry, analysts said.
Benchmark Singapore jet fuel was at $23 per barrel on Tuesday,
a near 77-percent jump from around $13 in March.
"Higher fuel prices increase unit costs and impact margins of
airlines. The impact will start to factor in (at) the end of this
year and first half of next year," said Lim Beng Eu, analyst at
Vickers Ballas Securities.
Fuel costs normally total about 10 to 15 percent of airline
operational costs, the second largest expense besides labor.
When jet fuel prices jumped to over $33 per barrel in late
1996, many airlines passed on the cost as higher fares.
But that will not be the case this time around.
Industry sources said keeping fares low was crucial for
airlines trying to regain market share in the aftermath of the
regional economic crisis.
"We cannot use the higher prices to justify higher ticket
prices," a Japan Airlines (JAL) official in Tokyo said.
"What's happening now is the opposite. Some airlines are
trying to lower ticket prices to regain their market share," the
official said.
JAL is Asia's largest commercial airline fuel buyer and the
sixth largest in the world, with procurement of some 1.4 billion
gallons of jet fuel per year.
Analysts said if airlines chose not to pass on the higher
price to consumers, the ability of carriers to weather the burden
would not be same across the board.
They said airlines that thrive on fare discounts to lure
passengers would see break-even costs rise and thus could not
employ the usual price cutting strategies as effectively.
"The weaker carriers, when they see that fuel prices are
rising and that their planes are flying empty, would rather cut
back capacity," said Chin Lim, airline analyst at Morgan Stanley
Dean Witter in Singapore.
"This capacity would then be picked up by the stronger
carriers."
Chin said the higher passenger load factors for stronger
carriers would then mitigate the higher fuel costs.
He said carriers such as Singapore Airlines would perform well
in this environment because SIA had expanded through aggressive
marketing rather than price cuts.
Analysts said carriers likely to suffer most would be Thai
Airways, Garuda Indonesia and Philippines Airlines.