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.