US airlines are raising fares and rolling out surcharges as runaway fuel prices threaten to eat into profits.

Fuel surcharges are being added on international routes. JetBlue Airways said on Monday it recently implemented a USD$45 one-way surcharge in select Caribbean markets. Delta Air Lines said its surcharges vary by market.

Fees are also going up for passengers checking more than two pieces of luggage, and more carriers are ditching free snacks to save money, said Tom Parsons, chief executive of Bestfares.

"The airlines are jacking up rates wherever they think they can get away with it," Parsons said. "From the airfares to the fuel surcharges to the peak travel day surcharges, there's not much you can get from an airline these days other than a seat assignment."

Oil prices continued to rise on Monday amid continued unrest in the Middle East and North Africa.

NYMEX crude, which is directly tied to the price of jet fuel, was up 0.7 percent to USD$105.12. Shares of major US airlines were higher, with the Arca Airline index up 0.2 percent.

So far this year, several US fare increases -- supported by strong demand for travel -- have helped the industry offset higher energy prices. US Airways said last week that increases in passenger unit revenue to the end of February were likely sufficient to offset rising fuel prices during that period.

"Economic growth still remains strong," boding well for travel demand, said Ray Neidl, senior aerospace specialist with Maxim. He said cost reductions and capacity restraint in recent years have helped airlines fill more seats.

"Besides the ticket price increases, they've been doing really excellent yield management, eliminating deep discounts and fare sales and just concentrating on managing their seat inventory to the best degree possible," Neidl said.

Still, the threat from fuel looms not only in higher costs for airlines, but also in a potential dampening of demand as airlines get ready for warm weather and the peak travel season.

"Passengers are not necessarily going to be willing to pay a higher fare just because oil prices are higher," said Matthew Jacob, an airline analyst with ITG Investment Research.

"At some point, the higher oil prices may start to eat into discretionary income levels and that could in turn, start impacting the demand side of the equation," Jacob said.

The oil price uncertainty has led carriers to scale back plans to boost seat capacity this year. Frontier Airlines announced on Monday that capacity will be flat in the second quarter, against previous plans for growth of 2.5 percent.

American Airlines said last week it would cut capacity growth for 2011 by between one and 3.3 percent, and Delta last month outlined a capacity cut and plans to retire older, less fuel-efficient aircraft.

Discount carrier Southwest Airlines has taken "modest" fare increases but has not imposed fuel surcharges and doesn't plan to add incremental fees to offset fuel costs, spokeswoman Ashley Dillon said.

"We don't want to nickel and dime our customers," she added.

Source: Reuters

Geneva - The International Air Transport Association (IATA) downgraded its airline industry outlook for 2011 to $8.6 billion from the $9.1 billion it estimated in December 2010.  This is a 46% fall in net profits compared to the $16 billion (revised from $15.1 billion) earned by the industry in 2010.  On expected industry revenues of $594 billion, the $8.6 billion 2011 profit equates to a net profit margin of 1.4%.

“Political unrest in the Middle East has sent oil over $100 per barrel. That is significantly higher than the $84 per barrel that was the assumption in December. At the same time the global economy is now forecast to grow by 3.1% this year—a full 0.5 percentage point better than predicted just three months ago. But stronger revenues will provide only a partial offset to higher costs. Profits will be cut in half compared to last year and margins are a pathetic 1.4%,” said Giovanni Bisignani, IATA’s Director General and CEO.

Forecast highlights:

Fuel: IATA raised its 2011 average oil price assumption to $96 per barrel of Brent crude (up from $84 in December), in line with market forecasts. Including the impact of fuel hedging, which is roughly 50% of expected consumption, this will increase the industry fuel bill by $10 billion to a total of $166 billion. Compared to levels in 2010, oil prices are now expected to be 20% higher in 2011.  Fuel is now estimated to represent 29% of total operating costs (up from 26% in 2010).

Growing economies give airlines the opportunity to recover some of these added costs with additional revenues. For example, since early 2009, rising oil prices added 25% to unit costs while average fares (excluding surcharges) rose 20%.  But in 2011 higher revenues are not expected to be sufficient to prevent the rise in oil prices from causing profits to shrink by 46% from 2010 levels.

Demand: An increase in global GDP forecasts to 3.1% (from 2.6% in December) bodes well for continuing strong demand for air transport. In line with this, IATA revised its passenger demand growth forecast to 5.6% (from 5.2%) and its cargo growth forecast to 6.1% (up from 5.5%). Overall, this will generate a 5.7% expansion in tonne kilometers flown.

Capacity: Published airline schedules indicate a capacity increase of 6%, slightly lower than the 6.1% previously forecast. Of this, 5% will come from the 1,400 new aircraft being introduced to the fleet over 2011. The additional 1% is expected to come from the normalization of underutilized capacity in the twin-aisle fleet.

Yields: With capacity expected to increase by 6% in 2011 and demand by 5.7%, the gap is 0.3 percentage points. This has narrowed from the previously forecast gap which was 0.8 percentage points. While there has been some weakening in passenger load factors, as of January they remained near record levels at a seasonally adjusted 77.7%. Freight load factors are also high compared to previous cyclical peaks.  These tightening supply and demand conditions give scope for yield improvements. Passenger yields are expected to grow by 1.5% (up from the previous forecast of 0.5%) and cargo yields by 1.9% (up from the previous forecast of no growth).

Premium Travel: Premium traffic is an important contributor of a network airline’s profitability. Purchasing managers’ confidence is a leading indicator for business travel. In January, the JP Morgan/Markit Purchasing Managers Index hit a record high. Moreover, strong corporate reporting at the end of 2010 and expanding world trade will continue to drive business travel in 2011, albeit at a slower pace than we saw during the 2010 post-recession rebound.

Risks: Rising oil prices are always a challenge for airline profitability. If they are accompanied by strong growing economies and world trade, airlines have some opportunity to command prices that can offset the rising fuel costs. If, however, rising energy prices stall global economic growth there is a strong downside risk to this forecast. With oil prices now being driven by speculation on geopolitical events in the Middle East rather than strengthening economic growth, this is a significant downside risk.

“This year the industry is performing a balancing act on a very thin tight-rope of a 1.4% margin. It is a structural problem that the industry has faced with an average margin of just 0.1% over the last four decades. There is very little buffer for the industry to keep its balance as it absorbs shocks. Today oil is the biggest risk. If its rise stalls the global economic expansion, the outlook will deteriorate very quickly,” said Bisignani

IATA also highlighted the risk of increasing taxation, particularly in price sensitive leisure markets. In 2010, the industry saw new and increased taxes in the range of 3-5% of ticket prices in the UK, Germany and Austria. Recently, Iceland, India and South Africa have joined with plans for additional taxation. “This is a price sensitive business. Aviation has the power to stimulate economies. But that ability is being compromised by adding taxes at a time when we are struggling to cope with high fuel prices just to maintain anemic margins,” said Bisignani.

Regional highlights:

Asia-Pacific carriers are expected to deliver the largest collective profit of $3.7 billion and the highest operating margins of 4.6%. This is down substantially from the $7.6 billion that the region’s carriers made in 2010 and from the previously forecast $4.6 billion for 2011. While the strong economic growth in the region is still driving profitability, inflation fighting measures in China are slowing trade and air cargo demand.  The key reason for the downgrade from December’s forecast is that the region is more exposed to higher fuel prices, due to relatively low hedging on average.

North American carriers are expected to deliver $3.2 billion profit, unchanged from the previous forecast and down from the $4.7 billion profit made in 2010.  Higher oil prices will damage profitability in 2011, but earlier cuts in capacity have led to much stronger conditions for yields than elsewhere.  The US economy has also been stronger than expected.  Compared to our December forecast, better revenues in 2011 will offset higher fuel costs.

European carriers are expected to make a $500 million profit. This is up from the $100 million previously forecast, but well below the $1.4 billion that the region’s carriers made in 2010.  It is the carry-over from better than expected 2010 second-half performance that has led to forecast revisions. The ongoing banking and government debt crisis are keeping domestic home markets fragile. But the weak Euro is continuing to provide stimulus to export industries, outbound freight and long-haul business travel which is driving the upgrading of the region’s profit forecast. Even so, Europe’s carriers remain the least profitable among the major regions with an EBIT margin of 1.1%.

Middle East carriers are expected to return a profit of $700 million. This is considerably better than the $400 million previously forecast, but down from the $1.1 billion profit that the region posted in 2010. Political instability in the region is expected to take its toll in Egypt, Tunisia and Libya which combined account for about 20% of the region’s international passenger traffic. This is balanced by the Gulf area which benefits from economic activity related to high oil prices and whose hubs continue to win long-haul market share.  Load factors have also improved significantly for these airlines, as new capacity is being added at a slower pace than demand increases.

Latin American carriers are forecast to post a $300 million profit. This is down sharply from the $1 billion that the region made in 2010 and from the previously forecast $700 million. Strong economic growth and international trade in the region are driving travel and cargo demand and the region’s profits for airlines. Exposure to higher oil prices is the key reason for the expected deterioration in the region’s profitability this year.

African carriers are expected to break even. This is unchanged from the previous forecast but down from the $100 million profit that the region posted in 2010. Strong economic and transport demand growth on the back of foreign direct investment and rapidly growing trade links with Asia is keeping the region’s carriers out of the red. However, they face intensifying competition from Middle Eastern carriers and others for lucrative business traffic.

View Giovanni Bisignani's speech

Full Financial Forecast

Source: IATA

Emirates has increased its fares across all sectors, as it's unable to absorb rising oil prices, the company said in a statement on Tuesday.

Emirates said the increase in fares differs by markets and routes, declining to give any more details on how much the fares were increased.

"We have an active fuel risk management programme but with such market volatility it is impossible to fully absorb the impact of soaring oil prices," an Emirates spokeswoman said in the statement.

Brent crude held steady near USD$112 a barrel on Tuesday as investors remained cautious about Middle East supplies even as Saudi Arabia ramped up production to cover a drop in Libyan exports.

Rising oil prices will hurt profitability of airlines operating in the Middle East/North Africa region, analysts say.

Source: Reuters

Vueling chief executive Alex Cruz is "worried" and no-one is going to argue when he adds: "I think everyone is worried." It is not, after all, turning out to be a good year for oil.

As airline bosses and other energy price-sensitive business people returned to work after the Christmas and New Year holidays, the International Energy Agency raised the alarm, as several weeks of steady price rises saw the Brent Crude benchmark open January trading with a push to $95 per barrel, its highest price in more than two years.

International Energy Agency chief economist Fatih Birol was blunt: "Oil prices are entering a dangerous zone for the global economy." By early February, Brent Crude had broached $100 per barrier mark, traders fearing a fully-fledged revolution in Egypt, which produces little oil but controls the crucial Suez canal and pipeline routes from the Middle East to the Mediterranean.

And as Tunisia's revolt has started to spread, nobody is prepared to say Saudi Arabia will be immune to the wave of unrest.

Regardless of whether rising fuel bills derail economic recovery generally, from an airline industry perspective oil prices - closely tracked by jet kerosene prices - are in a trouble zone.

In 2010, Brent Crude averaged about $80 per barrel, but IATA flags jet fuel prices at the close of the year were more than one-fifth higher than a year earlier. If those prices prevail for 2011, the industry's fuel bill will jump $22 billion, wiping out last year's record $15.1 billion industry profit.

PROFITS UNDER PRESSURE

IATA is forecasting 2011 will see industry profits slump 40% to $9.1 billion, assuming Brent at $84 per barrel. However, director general Giovanni Bisignani warns: "For every dollar increase in the average price of a barrel of oil over the year, airlines face the difficult task of recovering an additional $1.6 billion in costs."

By IATA's calculations then, if oil averages $90 per barrel this year, the industry will return to losses unless it can find significant cost savings. For an industry frantically cutting costs since the 2008 oil price spike took prices into the $140s, major cost-cutting will not be easy. So how worried should airline bosses be? "The oil price challenges everyone in the industry," says British Airways chief executive Willie Walsh.

"There's only so much airlines can do to offset the increased cost. It will drive airlines that are unprofitable out of the industry ­because they just won't be able to survive but, ultimately, it's going to lead to higher prices."

He adds that if five years from now oil is $150 a barrel, the industry will have adapted to the new levels. "There will be fewer airlines and prices will be higher, which will impact on growth."

Michael Cawley, Ryanair deputy chief executive, adds: "There will be a mass of collapses and merger pressure in the future [with higher fuel prices]. Airlines with the most fragile balance sheets will be poorly placed to withstand fuel price increases."

BA's most visible response so far has been a February rise in its fuel surcharge. At Delta Air Lines, the response to an extra $400 million in first-quarter fuel costs has been to reduce planned capacity growth and raise fares.

PASSING ON THE COST

Raising fares is probably the first, obvious response to rising costs. Gareth Williams, chief executive of flight comparison website Skyscanner.net, says of BA's higher fuel surcharge: "The aviation industry suffered some significant setbacks in 2010, with new air duty, the volcano, strikes and snow cancellations. It's not financially viable for airlines to continue to absorb these costs indefinitely and stay solvent."

Aviation consultant Mike Boyd, of Boyd Group International, is optimistic airlines can adapt. "As the fare increases announced in the last week of ­December clearly indicate, carriers are looking over the horizon and pro-actively planning for future shocks to the system - in this case, the near-certainty of spikes in fuel prices."

However, industry analyst Chris Tarry, of CTAIRA, observes price rises only "stick" if there is excess demand for travel.

Asian markets are strong, he says, but in Europe, where the big volume market is for leisure travel, the demand outlook is not good so raising prices would be a volume killer. That condition puts airlines in a bind. They cannot go on absorbing rising fuel costs, says Tarry, but their greatest threat is lack of passenger demand.

Cruz also sees the fares dilemma in these terms. His worry is not his airline's viability but "how much flexibility we will have to pass on the price increases into tickets. Who among our competition might keep their fares low?"

One candidate is Ryanair. "The inevitable response of other airlines [to higher fuel costs] is to increase their fuel surcharges. This creates a slipstream effect," says Cawley. "Passengers vote with their feet and come to us, displacing demand to Ryanair which will inevitably drive up our average fares."

The other short-term response to rising fuel prices is hedging. Essentially a two-way bet against fuel price movements, hedging can keep a carrier's per-tonne fuel bill more or less constant.

According to Leo Drollas, chief economist at the Centre for Global Energy Studies, it is a technique used effectively by "strategic hedgers" such as Air France, British Airways or Lufthansa, which always maintain hedged positions. However, he suggests "tactical hedgers" such as ­Ryanair, which tries to dip into the hedging market when it fears rising fuel prices, often lose.

Airlines which panicked and hedged against sky-high prices in 2008 found themselves paying way over market prices after oil collapsed in August 2008.

Forecasting oil prices, he notes, is a mug's game.

OVER THE HEDGE

Cawley believes hedging plays an important role in cost control. "The first thing to learn [about fuel hedging] is it's impossible to beat it," he says. "We form a rolling view of the trends and try to buy against the trend and buy earlier. You can't anticipate fuel prices. If we could, we wouldn't be running an airline. We simply fix it at a range which we are comfortable with running the business."

Alaska Air Group, as a policy, uses hedges to lock the price of half its annual fuel burn, which chief financial officer Brandon Pedersen admits costs $50-60 million in insurance premiums.

Those costs make US Airways alone among US network carriers in not hedging, and its president Scott Kirby does not see spiking oil prices leading to a rethink of that policy. Transaction and insurance costs, he says, make it "hard to understand how you can make a systematic hedging programme work".

At Vueling, Cruz says hedging must be done at prices near that which the competition is locking in, but what is more worrying to him is, simply, the price level. Hedging at $101 a barrel could be very difficult, he says, adding: "Most airlines will not be able to continue with sustained pricing of $100-plus per barrel. I think we will see airlines falling down at those pricing levels."

One concern among energy watchers is global oil supplies will soon see an increasing reliance on difficult-to-exploit oil reserves. In other words, the easy oil has just about been used up.

The rising price trend also got a push by a hard winter in Europe and North America. As jet fuel is a derivative similar to heating oil, Leo Drollas, of the Centre for Global Energy Studies, notes refineries have to choose between the two - and he says airlines are paying for a cold winter.

A third pressure is potential for turmoil in the Middle East to spark the sort of oil supply geopolitical shock that has kicked off several recessions since the 1970s. Nobody anticipated this one and it is simply too early to say what may come of it.

One factor mitigating market worries is slack in the supply and storage chain, not the case when prices spiked in 2008.

Forecasting oil prices may be a hopeless task, but before the $100 per barrel mark had been crossed, Airbus's chief salesman John Leahy said the airframer expected a steady rise this year, through $100, but falling back to average in the mid-$90s.

In December, Sabine Schels, commodity strategist for Bank of America Merrill Lynch, forecast Brent would break through $100 in 2011, but average $88. Drollas is less optimistic, expecting Brent to average $93.

The $100 per barrel mark is significant. Schels believes prices above $100 are not sustainable as they cross the "pain threshold" for OECD countries.

Drollas notes the Saudis want to keep oil trading in the $70-90 per barrel range and are raising output in a bid to take the edge off recent rises. So oil in the $85-95 range looks a good bet: not high enough to derail recovery but high enough to keep global growth in check - and airlines sweating over fuel costs.

Source Flightglobal