Airlines will need to adjust to an era of higher fuel prices, and work more on fuel efficiency, even if tariffs descend from their current record levels, according to leading industry organisations.

With prices approaching $50 a barrel in late August, there was dispute amongst analysts about how much of the hike was due to speculation or supply disruptions, and how much was due to underlying growth in demand. But the consensus seemed to be that even if the current risk premiums were removed from the market, the underlying price would still be substantially higher than pre-crisis levels.

"In the 1990s, the median was in the $20s a barrel, but going forward it will be in the $30s," predicts John Hemlich, chief economist at US airline lobby group the Air Transport Association (ATA). "That is the difference between this and past spikes." Given pricing pressures in the US market, the only solutions Heimlich sees is for airlines to continue to focus on cutting costs and improving fuel efficiency. In the latter area, the ATA has recorded a 13% improvement in the past three years. Measures include retiring older aircraft, taxiing on one engine, and looking at every item of onboard weight. "Carriers have always done this, but now it is being done with increased scope and intensity," Heimlich says.

IATA too was in consultation with aircraft manufacturers in August to produce guidelines for airlines on more efficient operations. "A lot of airlines still do not have a formal fuel efficiency programme in place," says one IATA source.

Fuel surcharges are dismissed as a way forward by the ATA, following the failure of American Airlines to impose them in late July. "Pricing power in this market is nil at present," says Heimlich. In contrast many European and Asian carriers have added surcharges. Andrew Sentance, chief economist at British Airways, says this is the only way forward. "The industry is facing higher costs and must pass them on in prices," he says.

The European majors also have the advantage that they are more heavily hedged than their US counterparts. Sentance believes BA is typical in Europe in being 70% hedged till next March at $32 a barrel. In contrast, US carrier hedging ranges from 40% to nil.



Source: Airline Business