SIA fuel surcharges up, but MAS and AirAsia yet to decide on any hike

>> Tuesday, January 25, 2011

PETALING JAYA : The second round of fuel surcharges imposed by Singapore Airlines (SIA) and its unit SilkAir in just over a month will trigger an industry-wide reaction, especially since jet fuel prices have breached the US$110 per barrel mark.

Qantas was first to respond to say that a fuel surcharge imposition was imminent even though Australian carriers have some protection from the high value of the Aussie dollar against the US currency, in which oil is traded.

However, carriers in Malaysia have yet to decide on any fuel surcharges even though AirAsia group chief executive officer Datuk Seri Tony Fernandes said that “we won't burden consumers. We have learnt from the last fuel crisis.''

He added that “we are not affected by the higher jet fuel prices. The airline and its associates (Thai AirAsia and Indo AirAsia) are doing very well and there is plenty of ancillary income'' to offset any rise in jet fuel cost.

An analyst with a local brokerage concurred with Fernandes and added that the impact of the jet fuel hike for now on AirAsia's bottomline would be minimal. However, if jet fuel prices were to rise further, all airlines would be impacted.

The International Air Transport Association (IATA) is bullish about passenger traffic growth this year but has also warned that due to higher fuel costs, a fall in profits for the airlines from US$15.1bil in 2010 to US$9.1bil can be expected this year.

Malaysia Airlines (MAS) could not comment whether it would follow SIA's footsteps to impose fuel surcharges as its senior management team was involved in an in-house management programme. Nor could its subsidiary Firefly be reached for comment.

However, MAS managing director Tengku Datuk Seri Azmil Zahruddin did say earlier that the airline would monitor the situation closely.

The local carriers are laggards; they will not impose fuel surcharges until other players such as Cathay Pacific, Garuda and Thai Airways do so, according to an analyst.

Whether it is now or later, any fuel surcharge imposition “would not be good for travellers' wallets but airlines have made it a habit of passing part of their fuel cost to travellers in the form of fuel surcharges or higher ticket fares,'' said a source.

IATA concluded in its January CFO survey that unit costs would increase significantly this year for airlines. For AirAsia, every US$1 rise in jet fuel meant its cost rose by RM17.8mil whereas for MAS it was a RM42.3mil rise given its wider network and bigger cost base, said an analyst.

“The breakeven point for the airlines is when jet fuel prices reach US$160 and US$130 a barrel respectively for AirAsia and MAS. Only then would they have to worry about profitability,'' he said.

He was of the view that the current rise in jet fuel prices was temporary and it should retrace. His prediction was that jet fuel would average US$90 a barrel this year while IATA's forecast was US$84 a barrel. IATA added that 30% of the industry's fuel needs were hedged this year but could not give the average hedge price.

MAS had 30% of its fuel hedged at US$100 a barrel this year and with jet fuel at US$110 a barrel, it was already out of the money, said an analyst.

AirAsia has not declared how much of its fuel is hedged this year, but last year about 15% of its total group fuel consumption was hedged. The airline had in 2008 abandoned its hedging policy, opting for spot buying to meet its needs after its hedges had turned sour and it was forced to make huge provisions for them.

Despite the rising jet fuel prices, analysts still have a “buy'' call on both stocks. For the full-year 2010, an analyst expects AirAsia group to report RM924mil in net profit and RM1.06bil for the current year. For MAS, he reckons it would be RM700mil net profit for 2011 and this is on assumption that jet fuel prices will be at the US$110 a barrel level.

On Friday, SIA and SilkAir said they would increase fuel surcharges for tickets issued on or after Jan 27 due to the recent sharp rise in the price of jet fuel. It said the price of jet fuel was above US$110 a barrel. The rise is between US$3 and US$27 per sector. This is its second increase in fuel surcharges since Dec 2, when jet fuel prices were above US$95 per barrel. Before December, the last increase was in June 2008. There were three fuel surcharge cuts in September and November 2008 and in February 2009, SIA said.

Carriers in the United States such as Delta, United, Continental, and US Airways have increased their fares to match rising costs and two Indian airlines, Kingfisher and Jet Airways, raised their fuel surcharges by up to US$4 per ticket on Jan 1.



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