SYDNEY, June 4, (RTRS): Airlines are locking in fuel hedges, lowering capacity, raising fares and retiring older jets to cope with rising costs alongside the highest oil prices since 2014, industry executives say. The squeeze from fuel costs, which have risen much faster than ticket prices, poses a particular threat to the industry’s profitability. The International Air Transport Association on Monday forecast airlines’ combined profits would be 12 percent lower than it had expected in December, at $33.8 billion in total, in large part because of costlier fuel. Brent crude is trading at around $76 a barrel, up nearly 50 percent from a year ago.
“At this point with rising fuel, you control costs, raise prices and you may have some fall off in demand and reduce capacity,” Air New Zealand chief executive Christopher Luxon told Reuters on Monday. “I think we are seeing pricing move up internationally and certainly yields come up as well,” he added. IATA forecast passenger yields, a proxy for airfares, will rise by 3.2 percent this year, in the first annual gains since 2011, as airlines look to recoup rising costs.
American Airlines CEO Doug Parker also forecast that fares could rise as capacity is reined in amid higher oil prices. China Eastern Airlines Corp Ltd has said it would consider using newly launched yuan-denominated oil futures to hedge oil for the first time in a decade, but others, like Emirates and Delta Air Lines have no plans to return to hedging as a result of the recent oil price increases.
“I think rushing to get hedged when the prices go up is a bit dumb and when they go down they get complacent again,” CAPA Centre for Aviation Executive Chairman Peter Harbison said. IATA chief economist Brian Pearce said hedging only delays the impact. “It stabilises earnings; it doesn’t stop the rising costs happening,” he said. Other carriers, such as Singapore Airlines Ltd and Air New Zealand Ltd, are well-hedged at lower prices but are being forced to hedge at higher prices as those contracts end, in keeping with their internal policies.