Airlines cut fuel surcharges

Carriers hope to boost passenger numbers

AIRLINES have begun to cut their fuel surcharge on passengers as crude oil prices dip to their lowest in almost a year in hopes of boosting passenger numbers as the industry fights the effects of the global financial crisis.

Australia’s Qantas announced on Wednesday it would reduce fuel surcharges on its international fares starting Thursday, while Europe’s Air France-KLM Group had announced a similar move on Tuesday effective Wednesday.

A spokesperson from Malaysian Airline System Bhd said the national airline had already lowered its surcharge for “certain customer sectors”.

Cargo subsidiary MASkargo has lowered its fuel surcharge rates to RM3.61 per kg effective Sept 29 from RM3.80 per kg previously for cargo uplift from Malaysia to International Air Transportation Association (IATA) Area 1 — South, Central and North and IATA Area 2 — America, Europe, Middle East and Africa.

An analyst with a local bank-backed brokerage told StarBiz: “With sharply declining crude oil price, there is the benefit of a falling cost base but the financial crisis is creating many challenges to the industry as well.”

MAS and AirAsia aircraft at the KL International Airport. The airlines are cutting their fuel surcharges to lower the cost of flying. - AFP

He cites the fact that airlines globally were facing difficulty in securing loans to finance the delivery of new aircraft scheduled for the next two to six months.

At the same time, as many airlines globally were going bust, borrowing costs were going up as banks become more wary of lending to companies in the sector.

This was made even worse with bank collapses in Western countries, prompting financial institutions globally to adopt more stringent “risk management, which includes raising interest rates,” he said.

The financial crisis was also causing problems for airlines seeking to hedge fuel costs, with instability in the banking sector making it harder for airlines to find a reliable source of hedging tools.

However, OSK Investment Bank acting head of research Chris Eng said: “Many airlines have hedged their fuel costs when prices were at record highs, so it really doesn’t matter now if the counter-party bank can’t meet its commitments.”

Airlines would not be exercising their hedging contracts to buy fuel at the record prices when they can purchase at current lower rates.

Looking for hedging contracts to lock-in the current lower price of fuel, however, would be harder.

The first analyst said that global challenges” could be a factor keeping some airlines from lowering their fuel surcharge.

He believed that the global credit crisis was affecting AirAsia Bhd more than MAS, given that AirAsia was more heavily leveraged due to aggressive expansion of its fleet being a newer airline while MAS was only replacing its fleet.

AirAsia could be seeing higher financing costs almost immediately, he said, adding: “AirAsia’s loans are (denominated) in US dollars and the dollar is shooting up.”

Airlines also have been quick to cut their fuel surcharge, therefore, lowering the cost of flying to the benefit of passengers.

A spokesman for Malaysian budget carrier AirAsia told StarBiz: “We are currently reviewing the fuel surcharge and would announce a decision soon. Generally, lower fuel price means lower costs for us operationally and its contributes to the bottomline positively.

“We are unable to disclose this information but AirAsia charges the lowest fuel surcharge among local airlines.”

Jet fuel is typically priced at US$25 to US$35 above the crude oil price with the latest IATA quote on Oct 3 at US$140.4 per barrel.

Source : STAR
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