- 18
- JUN
- 2012
The airlines are fighting a losing battle against rising oil prices
Author: Victoria Barnato - Categories: CSR & Green
The airline industry association IATA announced that it expects profits to halve this year with a profit of just $3.0 billion. That compares with a profit of $7.9 billion in 2011.
What is behind this decline? This year’s poor result is partly due to the Eurozone sovereign debt crisis.
However airline profit margins have been declining over the last decade.
The primary reason is rising fuel costs due to rising oil prices (forecasted to average $110 a barrel this year).
A decade ago fuel costs accounted for 13-14% of an airline’s costs. Now they account for 33%, according to IATA.
Airlines are using a variety of strategies to control fuel costs. This year Delta, the world’s second biggest airline, bought its own oil refinery. It hopes that this will ensure a secure supply of low cost fuel. Kenyan Airways’ chief executive announced, after fuel costs rose dramatically this year, that the company would use fuel hedging and joint fuel buying to cut costs.
Such measures will protect some airlines from bankruptcy. However, if oil prices get sufficiently high the industry’s survival will be threatened. Airlines will be forced to pass on costs to travellers. Where there is excess demand, like in the Asian markets, airfare rises will be accepted. However if airfares get high enough only the super-rich will be able to afford to travel. People will also substitute travel with voice and video communication technologies like Skype.
The airlines’ best chance of survival is to sharply cut fuel consumption. This will require huge investment in building green planes. The industry is already moving in this direction with fuel efficient planes like the A380 and the Boeing 787 Dreamliner. The industry is also investigating renewable energy air travel.
Developing new plane models is a costly and a lengthy process. These planes have to be as fast and as convenient as current commercial jets. The industry is also hampered by safety concerns. The airlines (and the public) will be nervous about using planes built on experimental technologies. However without such measures the long term survival of the airline industry is in doubt.
