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Turbulence ahead for airlines despite oil price drop

Many are at risk of posting major losses as the cost of their top input remains historically high

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I / Paris May 27, 2012, 14:40 IST

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 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 finance director Martin Murray.

It "relieves the pressure a bit," acknowledged 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% 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% 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% 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.

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