Tuesday, 27 January 2015

Coffee beans & Jet Fuel: Why plummeting oil prices does not equate to cheaper airfares

It's a turbulent relationship to say the least.  From towing planes to the runway and tweaking wing designs to curbing passengers' oversized baggage. For years, airline executives have been trying to find ways to save every drop of fuel.

But with oil currently trading at about $48 per barrel, isn't it about time the travel consumer started to reap the rewards of these plummeting prices?

The Chancellor of the Exchequer certainly thinks so, tweeting last week, "Oil price was $53 pbl last night - lowest in 5yrs. Vital this is passed on to families at petrol pumps, through utility bills and air fares"

Hugo Burge, CEO, Momondo Group predicts 2015 will see consumers benefiting from lower prices, stating, "We expect/ hope that airlines will pass on some of this in reduction of fares to help encourage demand (whilst also being significantly more profitable and able to invest in better services for the future too). Air Passenger Duty reductions will also help consumers to go further. In short, we predict a happy year for consumers on the price front”.


So, here's the good news, Hugo is right - the flying public is likely to benefit from lower air fares... 
but the fall is by nowhere near as much as the oil drop might imply.  On top of this, you'll be waiting some time before you start to see the benefits of lower jet fuel costs.

Here's why:

1.       Fuel surcharges - Leading airline groups including IAG, Delta and United continue to impose fuel surcharges. The European and US carriers are holding their ground, arguing, airlines
1.have yet to recover fuel costs for the last decade. But as their Asian peers (Japan Airlines, Qantas, AirAsia) have moved to reduce or phase out fuel surcharges in light of sliding oil prices, the legacy carriers are coming under increasing pressure to cut surcharges.

2.       Hedging Jet Fuel - While jet fuel prices roughly track crude historically, they have not dropped quite as rapidly. Coupled with this is the fact that many airlines have hedged fuel well into 2015 and later in some cases. Ryanair, for example, will pay approximately $93 per barrel for 90% of its fuel in 2015-16 and estimates that it will cut just 4% of its fuel costs.

Meanwhile, Flybe shares were hit hard in recent weeks with a drop of 23% and have no show no sign of letting-up, having contracted to pay $128 per barrel until March 2015. Heavily hedged airlines are at the mercy of the oil suppliers and will have to wait until 2016 before experiencing the benefits of lower jet fuel prices.

But it's not just hedges and surcharges that keep air fares in check. As air travel demand continues to grow, why would any savvy revenue manager opt to substantially reduce air fares? Or, as one industry body put it, "Airlines should be treated like any other business - when the price of coffee beans falls, no one asks Starbucks why his or her latte does not cost less ".


But with good looking load factors, growing global demand and a favourable oil price, there's no denying airlines have an opportunity to improve margins over the next two years. The jury is still out as to whether these gains will be transferred to the travel consumer.

Written by John Gallagher. John is organising the annual EyeforTravel's TDS Europe 2015, the meeting place for Europe's senior travel executives. You can get in touch with him on John@eyefortravel.com

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