Fuel prices dragging down airlines but no dent in holiday plans of Asians

Mon, 05 Sep 2005

Vijay Joshi Associated Press Kuala Lumpur, Malaysia

The math of the aviation industry isn't rocket science. Simply calculated, higher fuel bills mean lower profits.

The unrelenting climb of oil prices has badly hurt the bottom lines of airlines across the Asia-Pacific region, bringing losses at Thai Airways, Malaysia Airlines and China Southern, and forcing many to raise ticket prices through higher fuel surcharges.

"Everyone is suffering from high oil prices, even the best- managed carriers," said Andrew Herdman, the director general of the Association of Asia Pacific Airlines, which represents 17 regional carriers.

But the good news for consumers is that ticket prices have gone up only modestly, not enough to dampen travel in the year- end holiday season, analysts and industry watcher say, as Malaysian property evaluator Jeannie Tan will attest.

Tan is planning an 11-day package tour to China the end of September on Malaysia Airlines, and says she was not deterred when the fuel surcharge was raised in July from 38 ringgit (US$10) to 53 ringgit

"It's not really a big deal. If (the hike) is less than 100 ringgit. I don't think I will feel the pinch," Tan said. "It won't affect either my plans or the tourism market."

Singaporean teacher Francis Lau, planning a year-end Hong Kong holiday, also said he would have second thoughts only if the fare went up by up more than S$100 ($59).

Like Lau and Tan, hundreds of thousands of other Asians and Australians will go ahead with vacations, but with small changes in travel plans. Instead of taking long flights, which have higher fuel surcharges, they will go to spots closer by, said Imtiaz Muqbil, a Bangkok-based travel analyst.

For example, Qantas imposed an additional $11 surcharge on international routes but only a $4.50 surcharge on flights to New Zealand. Thai Airways raised its surcharge on regional routes by $5 and on intercontinental flights by $15.

Muqbil, the editor of Travel Impact Newswire, said holiday makers may also decide to stay in cheaper hotels and forgo the luxury of a spa or that extra bottle of wine.

"I won't say it will result in a downturn. People will travel. There is no doubt about that. But instead of going to Europe, you will go to Thailand," he said. "I don't think there will be a decline at all in the travel industry."

In fact, the seats on flights to Asian destinations are overbooked during the upcoming Malaysian school holidays in the first week of November, said Chong Voon Siong, operations manager of Amerasia Tours and Travels in Kuala Lumpur.

"There are no cancellations at the moment," he said.

Jet fuel is for most airlines the single largest operating cost. Last year, it accounted for 20 percent of AAPA's member airlines' costs. That figure is approaching 30 percent now. Their collective fuel bill last year was $12 billion. It is expected to be $18 billion to $20 billion. this year.

The high price has taken a heavy toll on an industry that never has been very profitable.

Malaysia Airlines reported a loss of 280.7 million ringgit ($73.9 million in the April-June quarter. Thai Airways International had a loss of 4.78 billion baht ($116 million in the same period.

And China Southern Airlines Co., one of China's biggest carriers, reported a net loss of 907 million yuan ($112 million) in the first half of 2005.

Hong Kong airline Cathay Pacific Airways Ltd. reported a 6 percent drop in its first-half net profit while Singapore Airlines' first quarter net income fell 8 percent.

They all blamed jet fuel prices, which are up 50 percent over last year.

Still, fares have gone up only 10 percent since 2004, mainly because of airlines' reluctance to impose higher fares in a highly competitive market, said AAPA's Herdman.

"Most people in the industry are focused on matching price and maintaining market share. If someone is brave enough to raise the fare and it is not matched, they lose their nerve and drop the prices again," he said.

Asia-Pacific airlines have also been hit by a modest growth of 3 percent to 4 percent in cargo traffic, compared to 7 percent in passenger traffic over last year. Cargo accounts for about 20 percent of revenue for Asia-Pacific airlines.

The latest crisis has increased the motivation of airlines to improve fuel efficiency, optimize operational procedures and minimize fuel wastage.

Most airlines are now focused on reducing the taxiing and take off-periods and reaching cruising altitude quickly. A Boeing 747 jumbo consumes as much fuel per passenger per mile at cruising altitude as a small passenger car. The new Airbus A380 consumes even less.

Herdman said airlines are also talking about coordinating with various governments and air navigation controllers to let planes fly in a straight line to conserve fuel. At present, they are guided through the skies by a network of radio beacons that make the flying paths a zigzag.

Many airlines have hedged against fuel prices by buying future stocks. But it is not a panacea to all their woes, said Damien Horth, aviation analyst with UBS Warburg Asia Pacific in Hong Kong.

"It's just a short-term protection," he said. "The only way to deal with higher oil prices is to either raise fares, which is difficult, or cut costs."

View JSON | Print