AirAsia maintains fuel surcharge, cites very weak ringgit

PETALING JAYA: The AirAsia group will not revise the fuel surcharge it charges travellers even though the price of crude oil has plummeted by 40% from its peak some months ago.

“No plan to lower the fuel surcharge as the ringgit is very weak,” AirAsia group chief executive officer Tan Sri Tony Fernandes told StarBiz.

AirAsia said its fuel surcharge was determined by the length of the flight. Longer flights require more fuel and hence a higher fuel surcharge.

“Woke up this morning in Hong Kong and saw oil dropped another six dollars. Massive for AirAsia and AirAsia X. Early Xmas present as hardly hedged in 2015,” Fernandes said in his Twitter post recently.

Endau Analytics aviation analyst Shukor Yusof believes that budget airlines are the main beneficiaries in a low jet fuel price environment due to their business models.

He said AirAsia remained a strong carrier, given its size, network and first-mover advantage. However, it remains to be seen if the financial woes of AirAsia X Bhd will have a significant impact on the group.

“In my opinion, surcharges should be reviewed now that crude is well below US$70 (RM244) per barrel. But airlines typically are quick to impose higher fares than to reduce them even when oil prices are trending lower. It would be harder to justify it if oil prices slip further,” he opined.

Fuel is the biggest expense for an airline and the declining crude oil price is expected to improve the bottom line of airlines long struggling with the high cost of energy.

Optimism on better profits has seen AirAsia Bhd’s share price rise as crude oil prices drop. Its shares have risen some 24% over the period when crude oil dropped from its peak. AirAsia X’s share price, though, has fallen by about 6%.

The price of crude oil has fallen some 40% since mid-year, from around US$107 a barrel in July to US$68.15 a barrel for Brent crude oil yesterday.

While lower crude oil prices will help, the weaker ringgit against the US dollar will have an impact on airlines that pay for fuel and aircraft in US dollars.

Analysts said the dip in oil prices was a “major tailwind for most airlines”. The lower oil prices would “ease the pressure on the airlines’ break-even load factor and their profitability”, as fuel accounts for between 30% and 50% of their total operating costs. Nonetheless, they said fuel prices would need to stay low for a lot longer before they would consider cutting the surcharge.

Not all airlines will benefit though. Carriers could end up with losses from the sudden steep drop in oil prices had they hedged their fuel purchases at higher prices.

It is reported that Singapore Airlines Ltd hedged its jet fuel fuel cost at an average US$116 a barrel when spot market rates were about US$85. Airlines that buy more fuel at spot prices, such as Qantas Airways Ltd and Asiana Airlines Inc, stand to gain more from the drop in oil prices.

AmResearch said the massive fall in fuel prices was a boon to AirAsia. The research house estimates that every US$1 per barrel fall in jet fuel raises AirAsia’s financial year 2015 (FY15) forecast by 2.4%.

It expects AirAsia to benefit significantly from cheap fuel from the first quarter 2015 onwards.

“For the remaining part of FY14, we understand that AirAsia has hedged up to 40% of its fuel requirement at US$118 per barrel (jet fuel hedges), which means the gap down in oil price will be muted to a certain extent till year-end,” it said.

While there is a basis to cut fuel surcharges, one analyst said airfares on a per pax per km basis was very low compared with its price three years ago.

“Travellers would look at the overall cost of the ticket instead of the fuel surcharge alone,” he opined.

The analyst said AirAsia had a very low-cost model and that it could survive without fuel surcharges, but it would eat into its profit. He said for the airlines and travellers to benefit, any move to reduce airfares would need to be weighed against a significant increase in an airline’s load factor.

“In the near term, airfares will not likely fall unless consumer demand turns favourable,” he said.

The analyst said AirAsia had hedged some of its fuel requirements, some believing up to about 20%, for the early part of next year. The hedging was done last quarter when the price of crude oil was still high.

Some analysts believe AirAsia would maintain its fuel surcharge for a while more and thereafter may consider lowering it.

Meanwhile, AirAsia told Bursa Malaysia yesterday that it had entered into a brand licence agreement with PT Indonesia AirAsia Extra (IAAX), an Indonesian joint-venture company of AirAsia X, in relation to the use of the brand name, trademark and logos of AirAsia X in Indonesia, subject to IAAX obtaining an air operator’s licence issued by the Indonesia directorate general of civil aviation.