Airfares are about to get more expensive
BAD news, budget travellers: the price of flights is about to get more expensive, according to the bosses of several major airlines.
At an annual meeting of the International Air Transport Association (IATA) in Sydney this week, a hot topic for airline bosses and delegates has been the skyrocketing price of oil, which is at its highest since 2014 - and rising at a faster rate than ticket prices.
With fuel making up around 25 per cent of an airline's costs, they will be forced to drive up the price of their fares to cope, American Airlines chief executive officer Doug Parker warned.
He added that as carriers looked at ways to drive fuel efficiency, they may also consider reducing the capacity of their aircraft - which may mean there are fewer seats to pick from, Fortunereports.
It's not the first time Mr Parker, who leads the world's largest airline, has warned about having to pass on the rising cost of fuel to passengers.
"Oil is our second-largest expense. So when it increases, the cost of air travel increases," he said in April.
"I would expect you would see higher fares to consumers over time."
Air New Zealand chief executive Christopher Luxon echoed that warning in Sydney this week.
"At this point with rising fuel, you control costs, raise prices and you may have some fall off in demand and reduce capacity," Mr Luxon told Reuters.
"I think we are seeing pricing move up internationally and certainly yields come up as well."
Brent crude is trading at around $99 a barrel, up nearly 50 percent from a year ago, Reuters reports.
Some airline companies, such as China Eastern Airlines, have signalled plans to hedge oil while others, like Emirates and Delta, ruled it out.
Aviation chiefs and economists at the IATA conference suggested hedging did not avoid the inevitable impact of rising fuel costs.
"Whilst most of us have hedging in place, that hedging eventually runs out or gets replaced by new positions you have got, and it is a question then of what do you do?" Virgin Australia Holdings Ltd CEO John Borghetti told Reuters.
"If you look at history, typically some of that cost has to be passed on at some point because you just simply can't absorb it."
Between mid-2014 and early 2015, lower oil prices ushered in an era of lower airfares and bigger growth for airlines.
This year, the price of oil is expected to average more than $91.40 a barrel. The IATA had been expecting it to reach only $78.40.
The association has now revised its estimated overall industry profits to $44.6 billion, which is 12 per cent lower than it originally forecast in December.
"We have seen a rise in the fuel cost now for almost 15 months," IATA chief executive officer Alexandre de Juniac said.
"Usually you see an impact on fares 10 to 12 months after, but for the moment I have to say the fuel increase has not been passed on in fares."
Will it happen? Mr de Juniac said that was up to the airlines.
"It is also an individual decision by each airline to decide whether or not they want to increase the fares to reflect the increase in fuel costs," he said.
The lower fuel prices of recent years also helped spur a higher-than-projected growth in passenger demand.
That was also likely to change, said Peter Harbison, executive chairman of Sydney's CAPA Centre for Aviation.
"If they are forced to start raising prices, that traffic growth could very quickly disappear at the same time that profits disappear," he said.
Airline bosses have also voiced concerns labour and infrastructure costs could also contribute to the end of a three-year run of unusually high returns for the airline industry.
Still, the IATA expects passenger air travel to expand by 7 per cent in 2018.
That rate is more sluggish than the 8.1 per cent growth recorded in 2017, but it's faster than the 20-year average of 5.5 per cent, for the sixth consecutive year.