Next stress level for oil at US$152

LAST week’s crude oil price surge will deal further blows to airlines worldwide. Already wounded by a 50% rise in oil prices since the beginning of this year, airlines face further capacity squeeze that will potentially lead to scrapping of more routes in the coming weeks.

KFH Research Ltd group chief economist and head of global research Baljeet Grewal expects the next price resistance level for crude oil to be at US$152 a barrel.

On Thursday, crude oil for August hit US$146.10 a barrel in New York but later settled at US$145.30 a barrel.

Crude oil is expected to test US$152 per barrel soon. This means airlines would have to pay more for their fuel bills.

Many airlines have only hedged half of their fuel requirements this year and Malaysia Airlines Bhd (MAS) is one of them.

It has 43% of its fuel requirements hedged this year compared with 70% last year.

MAS and AirAsia are going for fuel efficient aircraft to counter the effects of high fuel prices

Soaring fuel costs would continue to affect airlines and so far, 26 airlines have collapsed since the beginning of 2008. Many airlines have issued profit warnings and MAS has made it clear that it would be a “tough’’ ride ahead.

Singapore-based Standard & Poor's equity research analyst Shukor Yusof said: “The challenge for airlines is to be profitable. However, not all airlines can survive if crude oil continues to stay at high levels. There will be causalities globally.’’

With the capacity squeeze, flight delays and cancellations can be expected. To reduce cost, trimming of workforce is unavoidable and some American airlines have announced plans to lay off their workers.

There seems little hope that any hike in airfares would fully cover the rising cost of fuel. Airfares are said to have gone up 20% in the last few months while fuel costs have shot up by 70% since last year.

MAS so far has reduced capacity by 6% while Qantas, which is embroiled in a dispute with its workforce over wage claims, may take out 14% of its flying capacity to ease the damage from soaring fuel costs.

MAS managing director Datuk Seri Idris Jala said similar to other carriers, MAS would right size capacity to match passenger demand.

This includes combining frequencies on routes where there was more than one daily/weekly service and matching actual passenger demand with the right capacity aircraft.

In capacity reduction, grounding of gas-guzzlers would be a priority for airlines.

Reports say that about 500 of the older aircraft in the US have been grounded so far. In a scenario of high oil prices, fuel-efficient aircraft can help ease the burden of high fuel bills.

In this region, Singapore Airlines has the youngest fleet, MAS’ fleet is about 15 to 17 years old, the Philippines Airlines has a relatively new fleet, while Garuda and Thai Airways are over 20 years old, said Shukor.

MAS has ordered several of the fuel efficient aircraft (6-A380 via Penerbangan Malaysia Bhd, 35-B737-800 and 15 ATR 72-500) and the deliveries will be in the next four to five years.

AirAsia also has one of the region’s biggest aircraft orders. “The new orders are for more fuel efficient aircraft to replace the older aircraft. With fuel costs accounting up to 40% of operating expenditure currently, the new fuel efficient aircraft can help airlines contain this cost to a certain extent,’ Idris said.

The A380 burns 12% less fuel per seat, ATR burns 50% less fuel than a regional jet and the B737-800 burns 3% to 4% less fuel, he said.

Over 800 new aircraft are expected to enter service in the Asia Pacific region in 2008 and 2009.

Shukor pointed out that this would be “over-capacity’’ given that the travel sentiment would remain low as “people would rather save cost”.

Idris said the airlines with orders during this crucial period would need to re-examine their orders.

However, MAS would not be cancelling its aircraft orders, he said.

To him, it makes perfect sense to order aircraft during an economic downturn since the deliveries are only expected when the economies and air travel gets better.

Meanwhile, AirAsia and Tiger Airways are eager to get their planes “sooner” rather than later.

“We understand that some airlines have cancelled orders or are holding back on delivery schedules.

“Tiger is in talks with Airbus to bring forward the deliveries of its aircraft orders so that we can operate more low fare flights across the region to meet passenger demand,’’ Tiger Airways said in an email response to queries from StarBiz.

AirAsia group chief executive officer Datuk Tony Fernandes in his SMS reply said the airline was in negotiations with Airbus and it had no plans to hold back its growth plan.

Both Boeing and Airbus have managed to collect over 7,000 orders for fuel-efficient aircraft over the past three years.

Reports also say analysts expect 25% to 30% of these orders to be at risk.

NYSE, latest oil reports and other business news from AP-Wire

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