Airlines left with few easy options as jet fuel prices spike

London (Platts)--8Mar2011/822 am EST/1322 GMT

Airlines are facing tough decisions to protect their profits under pressure from the strength in jet fuel outright prices since the unrest in the Middle East that started in Tunisia in early January, market sources said.

Airlines in recent years have resorted to raising their fuel surcharges to at least partly cover the rise in their fuel bill which is now estimated by the International Air Transport Association to reach 29% of total operating costs in 2011, up from 26% in 2010.

"The problem for airlines is that they have to cope with high oil prices," said a trader with one of the European airlines.

The jet fuel price for delivery into Northwest Europe hit a high of $1,045.25/mt, according to Platts assessment Monday -- the highest since September 24, 2008 when they reached $1,069.50/mt, Platts data showed.

Barge prices reached $1,069.25/mt Monday, the highest since they reached $1,075.50/mt on September 2, 2008, according to Platts data.

On February 8, the UK's flag carrier British Airways raised its fuel surcharge on long haul flights by GBP24 (about $39) for a return flight.

A spokesman for the company did not discount any possible increase in surcharges due to the rise in oil prices.

"We keep our surcharges under constant review," a spokesman for the company said.

But raising the fuel surcharge also has problems due to the tough competition in the industry.

"Sometimes airlines can raise the fuel surcharge, but as the competition is strong the entire surcharge [to reflect the full rise in prices] may not be possible which will...reduce profits," a source at one of the European airlines said.

Alternatively, airlines can hedge. But here too the steep rise in oil prices renders this an imperfect tool.

"It is late to hedge because the current oil price rise may be temporary," the source said.

The choice between hedging, raising surcharges and shouldering part of the cost is leaving airlines with a smaller pool of profits, according to IATA's forecasts.

Last week, IATA downgraded its profit outlook for the airline industry this year to $8.6 billion from its December forecast of $9.1 billion because of the recent rise in oil prices.

"This is a 46% fall in net profits compared to the $16 billion earned by the industry in 2010," IATA said in a statement.

The $8.6 billion profit in 2011 will equate to a net profit margin of just 1.4%, according to IATA.

--Walid Kurdi, walid_kurdi@platts.com

To subscribe or visit go to:  http://www.platts.com