Predictions that high fuel prices would ease back in 2005 are looking increasingly optimistic as the half-year mark passes, and carriers in both Europe and the Asia-Pacific region are feeling the pressure

Airlines are praying that oil price rises have overshot market fundamentals due to speculative behaviour by hedge funds and that prices could ease during the summer period. The worry is that prices will remain high during the winter season of peak fuel demand. This prospect has prompted Ryanair chief executive Michael O’Leary to repeat his warnings of a bloodbath in Europe later this year.

However, the impact of high oil prices in Europe is being mitigated by fuel surcharges, says Nicholas van den Brul, analyst at BNP Paribas, who notes that when these were introduced last year, carriers thought that competitive pressures meant that only 40% of these surcharges would stick. In fact, he says, it has been nearer to 80-90%.

Capacity on longer-haul services has been tighter, helping yields, van den Brul says. Even short-haul yields have not been as bad as expected, with low-cost carriers tracking the fuel surcharge-induced increases with their own price hikes, he adds.

However, British Airways warned that its fuel bill for the 2005-06 financial year would be around £400 million ($745 million) more than last year when presenting its full year results, some £100 million above previous estimates.

Another sign of the hurt being felt by European carriers is the warning by Austrian Airlines that it will probably make a loss for the year after adjustments for extraordinary items, as it reported a disappointing widening of first quarter losses. Austrian’s charter division was hit hard by the Asian tsunami disaster.

Lufthansa, on the other hand, managed to cut first quarter operating losses to €26 million ($31 million) from €116 million. Group chairman Wolfgang Mayrhuber says: “We have achieved a sound result despite a dramatic hike in oil prices. All the business segments contributed to this good performance.”

Air-France-KLM reported post-merger cost savings of €115 million for the year to March, ahead of an original conservative forecast of €65 million. However, the merged group’s margins of 2.6% for the year are still well behind the 6.9% reported by BA.

Asia-Pacific airlines are continuing to report healthy profits but warnings about the impact of higher fuel prices are starting to be heard at a louder level. The good news is nearly all the region’s carriers are still seeing strong passenger and cargo demand.

Air New Zealand is one that recently warned of the impact of higher fuel prices when it downgraded its profit forecast for the fiscal year to June. Malaysia Airlines (MAS) also blamed higher costs for a drop in profit, with net earnings down 29% for the year to March. The result came despite a 30% jump in revenues and MAS says fuel costs were a key factor, soaring 65% during the year.

MAS talked up its earnings report, however, saying: “We are pleased with these results which were achieved in spite of high fuel prices, heightened competition from full service carriers and increasing proliferation of regional carriers.”

Rival AirAsia meanwhile recorded a 150% jump in net profit for the third quarter to March but the market was disappointed as the low-cost carrier has warned it will probably miss its full-year earnings target. But it says: “We feel confident of the growth outlook for the business and consider that much of this profit will be recovered in the years ahead”.

Australian low-cost carrier Virgin Blue has also reported earnings that the market considered disappointing for the year to March. A 13% drop in net profit was reported for the 12-month period, despite strong revenue growth, as the carrier faced new competition and higher costs.

Positive numbers did come from Singapore Airlines, however, which reported a 64% jump in net profit and a 99% rise in operating profit for the year to March on the back of record revenues. Chief executive Chew Choon Seng called it an “outstanding result”, but warned that “there are more challenges ahead and we cannot be complacent”.


Source: Airline Business