Friday, June 27, 2008

How Fuel Increase Affects the Airline & Travel Industry

FUEL surcharge has, in recent years, become an accepted tra­vel expense and it represents the primary mitigating instrument for the explosive growth in fuel price for airlines. Employed objectively, this surcharge spares airlines and their customers the contention with ever-changing air fares as fuel price tracks upwards – and on rare occasions, downwards. Since its implementation, fuel sur­charges have mostly risen and customers are beginning to notice the huge disparity between surcharges imposed by different airlines for similar or comparable city-pairs.

Worldwide Aviation Ser­vi­ces sales executive, Ms Kath­leen Goh, said: “Business and corporate travel will not be affected, but holidaymakers may choose not to travel to destinations with exorbi­tant surcharges.”

Fuel hedging

Various factors account for fuel surcharges. A large airline’s demand for aviation fuel can be hefty and the Lufthansa Group has an annual requirement for seven million tonnes of aviation fuel – about Hungary’s total annual consumption.

To cushion themselves from the spiralling increases in fuel price, airlines practise fuel hedging, using either an outright swap (where the price is fixed and the airline gains when actual fuel price is higher and vice-versa) or a purchase option (where the airline buys fuel at a pre­determined price when the actual price is higher, but ignores this option and buys from the open market instead when fuel price dips).

Lufthansa corporate and fi­­nance communications spokes­­man, Ms Stefanie Stotz, said: “Fuel hedging pays off for Luf­thansa. In the past 17 years, net hed­ging results of more than US$2 billion have been generated.”

The more expe­rienced and efficient airlines that practise fuel hed­ging strike a fine balance and maximise their gains.

Aircraft type does matter

The fuel efficiency of an airline’s fleet plays a vital role in determining its requirement for fuel. Each successive ge­ne­ration of aircraft is more efficient and the B747-400 – once the workhorse for many airlines – is quickly being eclipsed by the B777-300ER. With only two highly efficient engines, the latter has replaced the four-engined B747-400 on longhaul routes operated by Singapore Airlines (SIA), All Nippon Airways, Japan Airlines, Cathay Pacific, Air France, etc.

The A380 bought by major airlines such as SIA, Qantas, Emirates, Lufthansa, Air France and British Airways also offers matching efficiencies, albeit with higher capacities.

With rising fuel price, airlines such as Malaysia Airlines (MAS), Thai Airways In­ternational and Qantas are losing competitiveness when operating their older generation B747-400s, B747-300s, B767-300ERs and A300-600s. Some are
beginning to consider cutting routes, redu­cing usage of certain aircraft and accelerating the retirement of others. MAS, which until recently operated three aircraft in special liveries, has repainted them in their standard livery to save on weight and expects to save about RM900,000 (US$277,344) each year in fuel cost.

Austrian Airlines, which does not practise fuel hedging and consumes 380,000 tonnes of fuel per annum, recently decided to buy directly from Kuwait Petroleum Interna­tional instead of through its usual supplier. It expects to save se­veral million euros even after factoring in transporting the fuel by train through Slovenia.

Other determining factors

Air routes are sometimes less direct – either as a result of geography or politics – and this adds to the fuel bills. Air Astana’s flights from Delhi and Bangkok to Almaty, and SIA’s flights from Dubai to Moscow are routed around mountains, while South African Airways had to avoid some parts of Africa en route to London during South Africa’s apartheid era.

Congestion in the air and at airports has been a major contributor to fuel wastage in the aviation industry. Europe is a major choke-point. Airlines are sometimes barred from flying the shortest routes due to restrictions by member states.

Lufthansa’s Ms Stotz said: “Between Frankfurt and Beijing, 7.5 tonnes of fuel are wasted because it is not possible to fly a direct route. The fragmentation of air traffic con­trol in Europe costs airlines and travellers roughly 3.5 billion euros (US$5.4 billion) annually. Unnecessary holding patterns and inefficient structures lead to flight detours averaging almost 50km.”

IATA has been championing governments to co-operate and un­ra­vel air routes. This has been relatively successful in many places.

Congestion on the ground is also a major issue at major airports such as Heathrow Airport. Ms Stotz said: “It is up to politicians to change and improve this unsatisfactory situation.”

Alternative fuels remain on the distant horizon and provide little immediate relief to airlines and travellers. The first generation of biofuel being experimented is still not viable. In the quest for alternative fuels, Ms Stotz said: “Lufthansa is convinced that biofuel must not compete with food production.”

Source : TTG
[tags : ]

No comments:




Related Posts with Thumbnails