Turbulence ahead for airlines despite oil price drop

China Eastern Airline jets are pictured at Hongqiao Airport in Shanghai, China. Airlines are still in for financial turbulence despite a recent fall in oil prices, although China Eastern Airlines says it would help if fuel prices remain at a reasonably low and stable level. AP PHOTO/ALEXANDER F. YUAN

PARIS—Airlines are still in for financial turbulence despite a recent fall in oil prices, with many at risk of posting major losses as the cost of their top input remains historically high.

“If fuel prices remain at a reasonably low and stable level, of course it’ll be favorable to operations of the company,” Wang Jian, board secretary of China Eastern Airlines, told AFP.

But “despite the recent reduction in oil price, it remains at historically high levels and a significant challenge to the business,” said Cathay Pacific finance director Martin Murray.

It “relieves the pressure a bit,” acknowledged Air France-KLM finance director Philippe Calavia.

But he noted the Franco-Dutch group has based its financial plans on oil at an average of $98 a barrel this year.

Oil prices are “still above over budget,” he said.

The price of oil continued to fall this past week, with Brent North Sea crude for June at $106.91 a barrel in late London afternoon trade, way off the $128.40 it hit on March 1 and the record $147.50 it set in July 2008.

Airlines in Asia and Europe have been struggling with the high price of fuel, the first or second-largest cost in their budgets, which has pushed many deep into the red.

Singapore Airlines saw its full-year profit plunge 69 percent year on year to $268 million due to high oil prices and global economic uncertainty.

Similarly Hong Kong-based Cathay Pacific saw its 2011 net profit slump 61 percent to $708 million and recently announced a raft of cost-cutting measures in response to high fuel prices.

Australia’s biggest airline Qantas, which has raised fares in recent months to partially offset higher fuel costs, said reduced oil prices were not yet helping its bottom line.

“Our fuel bill this year is going be significantly higher than last year, so the outlook is still very challenging as far as we are concerned,” a spokesman told AFP.

Jet fuel is Qantas’ biggest operational cost and in February the carrier said it had hedged 86 percent of its remaining fuel requirement for the financial year at a worst-case price of $121 per barrel.

Airlines, like many other companies, use financial instruments to protect themselves from possible rises in oil prices. But hedging can also trap them if oil prices fall below expectations.

“The main risk today is to rush to take advantage of current prices, which are still very high if falling, and finding yourself exposed to a loss on your hedges if prices continue to fall,” said Air France-KLM’s Calavia.

The airline, which is looking at a fuel bill some 1.1 billion euros ($1.4 billion) heavier than the 6.4 billion it spent in 2011, has hedged around 60 percent of its second-largest operational cost after wages.

German airline Lufthansa has hedged 76 percent of its fuel needs, and forecasts it will spend 7.5 billion euros this year compared to 6.3 billion in 2011.

Oil prices are now moving back to a level where airlines can make a profit, according to the industry group IATA, which represents 240 companies that carry 84 percent of global traffic.

“Our central forecast in March suggested that if oil averaged $115, then as a whole the industry would still make a small profit of $3 billion,” said IATA spokesman Chris Goater.

“But if oil were to spike to an average of $135, then we would see an industry loss of $5.3 billion,” he added.

European airlines are also not getting their hopes up too high too quickly as the slide in the euro has been eroding much of the gains in the drop of dollar-priced oil.

And until oil prices stabilize at a lower level airlines such as Cathay Pacific, Lufthansa and Air France-KLM intend to push forward with drastic cost-cutting plans.