Despite abolishing fuel surcharges, airlines unlikely to cut fares
SEVERAL global airlines have removed fuel surcharges but experts are saying travellers should brace themselves to pay the same airfares as last year as the removal is not going to translate into lower airfares.
Airfares have featured fuel surcharges since 2004. For some years they disappeared but they returned in 2011 when oil prices peaked at US$143 a barrel. Since then, travellers have been helping airlines foot their fuel bills.
Airlines collect billions of dollars in fuel surcharges every year but since oil prices plummeted 60% from their peak in June last year, their overall fuel bills have been much lower.
This week, three Malaysian carriers – AirAsia group, Firefly and Malindo Air – abolished fuel surcharges, which leaves Malaysia Airlines (MAS) still holding on to fuel surcharges.
A check on its website showed the fuel surcharge element missing. MAS chose to remain silent when asked if it was abolishing fuel surcharges like the other airlines.
It is a given that when airline’s biggest cost item, which is fuel, falls, fares should drop, but could airlines be jacking up fares to compensate for the removal of fuel surcharges, asked a traveller.
Maybank Investment senior analyst Mohshin Aziz predicts that airfares will stay the same this year even though the International Air Transport Association (IATA) had predicted a decline of 5.1% or more in 2015.
“What you paid last year will be what you pay this year for the all-in airfares. Fuel surcharge is just a sales gimmick, it is not going to make airlines drop all-in airfares even if they remove the fuel surcharge.
“This is all about encapsulated marketing. But at the end of the day people look at the overall fare to decide if they want to fly, not the fuel surcharge,’’ Mohshin adds.
Brendan Sobie, chief analyst with CAPA, feels airfares and yields are already low and it is unlikely airlines will drop airfares after removing fuel surcharges.
Competition is keen and will remain intense going forward.
The amount the AirAsia group charged as fuel surcharge was between RM20 and RM150. For firefly it was RM35 to RM45 depending on routes, while Malindo imposed a flat RM20 for domestic routes as it had abolished fuel surcharges for international flights seven months ago.
AirAsia’s loss in revenue this year for fuel surcharge totals RM700mil, and this is based on an average RM30 per passenger on assumption that it will carry 24 million passengers in 2015, says PublicInvest Research in a note.
Crude oil is about US$44 per barrel now while jet fuel prices have also fallen by nearly half to US$65.80 a barrel as of Jan 9, according to IATA data.
AirAsia has only about 15% of its fuel hedged this year at about US$100 a barrel and that means it will have a better profit showing this year, claims PubliInvest.
This is despite the fact that it has seen a drop in bookings after Indonesia AirAsia Flight QZ8501 with 162 people onboard went down in the Java Sea on Dec 28.
“Call it a knee-jerk reaction, but forward bookings are affected. MAS also suffered a drop in bookings when two of its flights were involved in two separate air disasters last year, but loads have since recovered to the pre-MH370 level,’’ says an analyst.
Malindo will lose RM20 for every passenger in fuel surcharge for domestic flights but since its parent Lion Group has a policy of not hedging, it is paying current prices which is 60% less than a year ago.
IATA has estimated that every US$1 decline in the price per barrel of jet fuel increases industry profits by US$1.7bil annually. For Asia-Pacific carriers, IATA has projected that the profit margins will average only 2.2% this year as there is some recovery in the cargo business and lower fuel costs, a report said.
That explains why airline stocks are the best performers on international markets since oil had more than halved in the past seven months.
IATA believes that cheaper oil could result in airline profits increasing by US$5bil to US$25bil this year, but profit per passenger will rise by just US$1 to US$7 due to intense competition.
Besides the three Malaysian carriers, several airlines have dropped fuel surcharges, including Cebu Air, Philippines Airlines, Cathay Pacific, Japan Airlines and Virgin Australia. Taiwan’s China Airlines Ltd and Eva Airways Corp have cut most or part of it while Qatar Airways plans to cut it and Emirates is still considering it.
Reports say Singapore Airlines will not cut its fuel surcharge, which is said to be the highest in the region.
Australia’s Qantas Airways Ltd became the latest airline to cut the surcharge, but at the same time said it was raising base fares as oil was not cheap enough to offset the impact of competition on international routes.
Many others will follow suit but US carriers are keeping the surcharges.
It is reported that US carrier Delta Air Lines would use US$2bil in savings from lower oil prices in 2015 to cut debt and return cash to shareholders, rather than cut fares.
Some airlines will not cut for now because they have hedging strategies that lock in prices from anywhere between three months and three years, depending on the percentage hedged and may not benefit from the cheaper oil said a report.
The other factor that will stop airfares from falling is the reduction in capacity in the region. That means airlines do not have to dump fares to fight for passengers.
There will also be fewer number of seats added to the system unless the low oil prices force airlines to rework their strategies, but as CAPA puts it, the return of 20% or 30% growth rates may not be realistic as the LCC market in South-East Asia is now more mature. There is a risk that lower fuel prices may cause some players to resume their aggressive expansion plans, it adds.
The 21 low-cost carriers (LCCs) in the region account for 60% seat capacity within South-East Asia and are making inroads in the medium-haul market, although LCC capacity growth slowed significantly in 2014, increasing by only 13% compared with seat capacity growth rate of about 30% in 2013, says CAPA.
Sobie believes that the fall in oil prices is a chance for airlines to improve the situation since 2014 was unsustainable for most South-East Asian carriers, and any drop in airfares will erode profit margins as competition is already intense in the region. Most of the region’s LCCs were unprofitable in 2014.
CAPA says a lot of peers are not in the position to completely remove surcharges, unless they are willing to take a hit on earnings to sell cheap seats at still expensive fuel cost.
“The more rational capacity deployment among Malaysian airlines (as yields are already at financial crisis levels), as well as a more rational pricing environment (following MAS’ restructuring) should allow base fares to rise to offset part of the impact of fuel surcharge abolishment.
Secondly, lower fares should improve load factors. The resultant higher traffic will increase ancillary revenue, which accounts for 26% of ticket sales. Finally, the lower crude oil price should be able to compensate from the impact of an 18% fall in yields, it adds.
“I don’t think the removal will spark a fare war that the market expects or make tickets any cheaper. Why should they drop fares when the demand is still there?’’ asks Mohshin of Maybank Investment Bank.
For ticket prices to come down, competition has to get worse with demand chasing supply but the overcapacity situation is easing.
“When demand is stronger than supply, then airlines have the pricing power; now there is no real urgency to lower fares,’’ Mohshin adds.
The 21 LCCs in South-East Asia have 536 aircraft of different types and CAPA says this year it will grow to about 600 planes.