Budget airlines more resilient against rising fuel prices

Budget airlines more resilient against rising fuel prices

Analysts say rising fuel prices will have a more severe impact on legacy carriers than budget airines, and a US$10 increase in the price of a barrel of fuel will likely reduce airlines' operating profits by between 20 and 28%.

The International Air Transport Association (IATA) estimates that for every one dollar increase in oil price per barrel, the airline industry needs to recover US$1.6 billion in additional costs.

Aviation analysts say airlines will pass on these rising fuel costs to consumers in the form of fuel surcharges and increased airfares.

"Budget airlines will be more resilient because after all the price increases they will still command the lowest fares compared to the legacy airlines; and there will be some downgrades of travelers from the legacy airlines to the budget airlines," said Mr John Rachmat, analyst for regional transport and consumers, RBS.

While higher fuel prices could erode the thin margins of low-cost carriers, analysts say these airlines still have a few things going for them.

"Low cost carriers have certain benefits in the current environment because one, they are very-well managed, very nimble and most of the low-cost carriers have aircrafts that are very fuel efficient," said Mr Shukor Yusof, aviation analyst for Standard & Poor's.

Still, analysts expect that if the political crisis in the Middle East and North Africa deepens, more carriers will consider hedging their exposure to oil prices.

So far, Garuda and Thai Airways have announced their hedging plans.

Meanwhile, analysts say Korean Air and Aseana Airlines will be affected by less demand for travel to and from Japan because of the twin threats of earthquake aftershocks and radiation leaks.

These airlines garner 16 to 20% of their revenue from Japan, compared with 4 to 6% for Cathay Pacific and Singapore Airlines.

Analysts say budget carriers in Southeast Asia such as Tiger Airways, Air Asia and Cebu Pacific will likely not be affected by the disaster in Japan.

-News courtesy of Channel Newsasia-