INTERNATIONAL. In rare good news for the hard-pressed aviation sector, oil prices are this week hovering just above a four-year low. And leading analysts believe it could stay around that level or below for a protracted period.
Light, sweet crude closed overnight in New York at US$43.71, a far cry from the all-time high of US$147 a barrel struck in July. The rocketing price of oil in the first seven months of 2008 was directly responsible for the collapse of a number of airlines and travel firms.
Since then, amid a growing international economic crisis, oil has headed in the other direction. Last week it touched a four-year low of US$40.50, a level not seen since December 2004.
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Click here to watch Paul Day talking to CNBC |
That spells very good news indeed for an ailing airline industry as it attempts to battle back from the woes of 2008. Fuel surcharges on air tickets have been a major deterrent to travel this year, particularly on long-haul travel out of the critical Japanese market. Analysts believe such surcharges will now become a thing of the past for some time to come.
However, a fall in the price of oil – and therefore jet fuel – does not necessarily translate into airline savings of the same magnitude, due to the practice of hedging. The International Air Transport Association (IATA) noted this week: “Without hedging, a US$40 a barrel fall in the price of oil and jet fuel would reduce fuel costs by over S$60 billion [across the airline industry -Ed]. However, while hedging reduced the price paid for fuel below the spot price during the first half of this year, it is working against the industry during the rest of the year and into 2009.
“As a result the effective fuel price only falls by an estimated US$17 a barrel which, with lower capacity, should cut the fuel bill by US$32 billion in 2009.”
Last week Merrill Lynch even predicted the commodity’s price could slump to just US$25 a barrel in 2009. Yesterday MIG Investments Deputy Head of Research Paul Day told CNBC: “We expect oil to probably trade in a range between US$36 and US$47, possibly for five years.”
Such volatility has direct and extreme repercussions for the airline industry – and therefore for related sectors such as travel retail. Driving up passenger numbers in a deeply troubled global economic environment is a key challenge in 2009. Those airlines which survived the brutal cull of 2008 will now be far better placed to do just that.
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MORE STORIES ON THE PRICE OF OIL
Emirates posts -88% profits fall as fuel prices bite, but confidence remains strong – 11/11/08
Final-quarter Japanese travel demand down, but some fightback evident – 29/10/08
Airlines in Japan ponder lower fuel surcharges to rejuvenate demand as oil prices soften – 18/09/08
