FUEL COST ERODING PROFITABILITY OF AIRLINES

GOP MUST COME-UP WITH A RESCUE PACKAGE BEFORE LOCAL AIRLINES DECIDE TO GROUND THEIR PLANES

SHABBIR H. KAZMI
June 16 - 22, 2008

Crude oil and jet fuel prices are touching record high levels and airlines have to take drastic measures to sustain and survive the financial distress. However, there seems to be no silver lining hope for recovery in the near future. Some of the airlines have come up with business plans to cope with prices escalating to new levels.

According to some industry experts jet fuel prices have surpassed the "survival mode". Airlines across the globe have already started actions by reducing number of flights, change of aircraft, enhancing ticket price, fuel surcharge on passenger/cargo and imposing fee on additional baggage.

Airlines have little choice on jet fuel prices and fuel surcharge is not enough to recover the cost of fuel and ticket price competition among the airlines do not support the fuel recovery.

The phenomenon is not unique for the local aviation industry. Even International Air Transport Association (IATA) has predicted the fuel bills of airlines to be 44% more as compared to last year. Institutional investors are the dominant players in instigating the rice in crude prices with more than 60% share in the oil business. Speculators are inducing billions of dollars into the commodity future market. Commodities future prices are the bench mark for the prices of actual physical commodities. When the future prices are higher, the impact is immediately reflected on the spot prices.

Jet fuel prices in Pakistan are established in line with kerosene prices in Arab Gulf market on a fortnightly basis. Recent substantial increase of Rs. 11/ liter of jet fuel would cause colossal financial dent to the national carriers having reaching and unmanageable impact on the already deteriorating financial health of Pakistan International Airlines.

Reportedly inn 2002, national flag carriers spent 9 billions rupees on fuel bills which now getting close to 37 billion rupees. The cost of jet fuel alone is 42 % of the total operating cost. PIA and other local carriers are now facing the crunch the high jet fuel prices. There is no subsidy/rebate on the jet fuel prices.

Citing high oil prices and the slowing economy, the IATA has sharply lowered its industry forecast for 2008, saying it now expected a collective loss of at least $2.3 billion.

In March, the group forecast a profit of $4.5 billion. The industry had reported a profit of $5.6 billion in 2007, the first since the September 11, 2001, terrorist attacks in the United States.

At its annual meeting, the association urged governments to roll back regulations that they argue are damaging the industry at a time when many carriers are in a situation it called desperate.

If the price of oil, now just below $130 a barrel and averages $107 over 2008, the industry will lose $2.3 billion for the year, the chief executive of the group, Giovanni Bisignani, said. Should it trade at $135 a barrel for the rest of the year, the industry will lose $6.1 billion, he added.

"After enormous efficiency gains since 2001, there is no fat left, and skyrocketing oil prices are changing everything," Bisignani said. "The situation is desperate and potentially more destructive than our recent battles with all the Horsemen of the Apocalypse combined."

Twenty-four airlines went bankrupt in the last six months - three to four times as many as the group usually records in a year. With airlines paying about 90% more for fuel compared with a year ago, chief executives of major carriers attending the meeting said they were staring into the abyss.

"It's not an industry problem anymore it's an economic disaster for countries if we fade," Bisignani said. "You can't cross the Atlantic on a train." Other problems facing the airlines, the group said, include uncertainty about the approaches by the European Union and governments toward state aid and airline mergers.

The chief executive of British Airways, William M. Walsh, said: "We're definitely as an industry in a crisis situation. With a softening in the economic environment, high oil prices, it's inevitable that fares have to go up."

While industry experts expect more bankruptcies, the key short-term question is who is best hedged against the oil rise. Experts look for the airlines with robust operations, the flexibility to adjust and the ones that are best capitalized.

The situation demands airline workers to accept the notion that jobs would disappear if costs were not cut. It is also imperative for the governments to act to untangle regulations that are strangling opportunities for carriers to improve business.

Airlines cannot fly to new markets without an international agreement. Carriers cannot look beyond national borders to try new ideas, grow the business, access global capital, or merge and consolidate.

Airlines are enduring crisis after crisis with their hands tied because flags, not brands, define their business and the situation must change.

Some of the airlines are critical of the European Parliament for imposing 100 amendments to its emissions trading plans after the International Civil Aviation Organization had already agreed to ambitious environmental goals.

The industry faced a bill of 6.4 billion euros ($10 billion), for a misguided and unilateral proposal that will inspire international legal battles but do very little for the environment. The European Commission has defended its plans to regulate emissions from most aircraft that land or take off from airports in the European Union.

The current situation of high energy prices is one more reason to move more quickly to low-carbon economies, said a spokeswoman for the commission, which proposed the legislation that is under review by the Parliament and European governments.

Everyone must be engaged in fighting climate change, and different businesses have to contribute according to the level of their emissions so that there is a level playing field, keeping in view the plans to include airlines in an emissions-trading system, which has operated in Europe since 2005.

Reportedly many governments are considering bail out packages for the airlines. There is an urgent need that the Government of Pakistan also looks into the affairs of aviation industry in the country before the carriers ground their aero planes.