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.

The company launched services in 2002, modeled after no-frills
U.S. carrier Southwest Airlines, which has successfully weathered
the ups and downs of the business for decades.

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.

Harbison said Asian airlines are being cushioned to some
degree from the rising fuel costs by an increase in traffic that
is pushing revenues higher.

"While there's a lot of fuel cost pain out there, the bottom
line is in most cases black because of the growth on the revenue
side," Harbison said.

In that regard, the low-cost airlines are putting a pinch on
the bigger players in that area, by forcing them to discount some
seats heavily.