Asia's low-cost airlines hold their breath as fuel costs soar
Asia's low-cost airlines hold their breath as fuel costs soar
Dirk Beveridge, Associated Press/Hong Kong
High oil prices are putting the squeeze on airlines worldwide, and passengers are seeing fuel surcharges tacked onto tickets as executives keep a nervous eye on the bottom line.
But low-cost budget air carriers taking off around Asia see little choice but to press ahead. They're pushing on with expansion plans and insist they can still beat their bigger, established rivals on price.
"Our fuel bill is small because we're small," said Sim Kay Wee, chief executive of Singapore-based Valuair, which has two Airbus A320s and flies daily to Hong Kong, Bangkok and Jakarta. "It's not as bad as if you're a big oil drinker, but we're riding the roller coaster, so to speak."
Even though Valuair's fuel bills are rising, it plans to double its fleet with two new jets, offering more services to Hong Kong and new ones to the western Australian city of Perth and Guangzhou, China.
Oil prices stirred worries about the global economy by pushing through US$50 per barrel on the New York futures market last month, then continually creeping higher into the mid $50 range. Analysts can only guess when prices will finally peak in what has been a one-way market for weeks.
Expensive oil is a particularly sharp blow for airlines, which count fuel bills among their highest operating costs along with staff.
If oil damages the broader economy it could cut into demand for air travel, though that has not yet been a problem in the Asia-Pacific region.
In fact, rising demand is helping carriers offset bigger fuel bills by increasing their revenue, said regional aviation consultant Peter Harbison.
Airlines have been hiking fares for months, trying to achieve a delicate balance between containing their higher costs without scaring off their travelers.
Even some low-cost carriers - who depend heavily on marketing that portrays them as more affordable alternatives to the big players - have had to push up ticket prices.
Valuair recently had to raise its fuel surcharge on tickets to S$8 Singapore per flight sector, but Sim says he can still keep his tickets about 20 percent to 30 percent cheaper than bigger carriers like Singapore Airlines.
Perhaps the best-known regional budget carrier, AirAsia, has not added on any fuel surcharges and it's moving forward with plans to sell shares on the Bursa Malaysia stock exchange as early as next month.
Kuala Lumpur-based AirAsia executives were unavailable to discuss any fuel worries due to restrictions on public comments ahead of the stock listing.
But with cash from the share sale, AirAsia hopes to expand its fleet by fourfold and mount a bigger challenge to established Asian carriers across the region.
Harbison said the impact of high fuel prices is being felt across the industry, though some larger carriers might be better protected after hedging their fuel costs in the futures market.
Others who didn't hedge are feeling more pain, said Harbison, managing director at the Center for Asia Pacific Aviation in Sydney, Australia.
"Once fuel prices went north of $40, very few carriers were ready to hedge at that stage," Harbison said. "They thought, 'We have to bear some pain for a while and ride this out."'
Airlines can hedge their fuel costs by agreeing to buy in the future at a specified price. If the actual market value of jet fuel rises, they save money on their purchases, but if it falls, the money they lose on the futures trade is covered by their lower cost for actual fuel.