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Airline Warn: Air Fares To Rise Despite Fuel Hedges

Airlines

The oil price run over the past year will result in higher ticket fares, even if many air carriers have hedged fuel at lower prices, according to industry executives and analysts.

This year airlines around the world will spend a combined US$188 billion on fuel, up by 26.1 percent compared to the US$149 billion spent on fuel for last year, the International Air Transport Association (IATA) said in its 2018 Mid-year report on Monday.

This year’s projected fuel spend is expected to account for 24.2 percent of total average operating costs, compared to 21.4 percent of total costs in 2017, IATA said.

“Jet fuel prices have continued to rise with oil prices and we base our forecast on an average price of $84/b this year, and $70/b for the Brent crude oil price,” the association said, noting that the impact on the industry’s fuel bill was dampened last year—and to some extent this year—by the impacts of fuel hedging in one or two regions.

Commenting on the higher oil prices, American Airlines chief executive Doug Parker said on the sidelines of IATA’s annual meeting in Sydney on Monday, as carried by Reuters:

“If it becomes clear this is the new normal you would see over time less capacity and growth in the industry and therefore higher prices, but I don’t think that’s going to happen in the near term.”

Hedging may help in the short term, but what it essentially does is buying airlines time to address the oil price volatility, industry executives said today.

“We take a simple view that hedging is about buying time; it gives you time to address volatility,” according to Willie Walsh, the chief executive of British Airways parent IAG.

Related: Why Oil Markets Should Fear Trump’s Trade War

“It stabilizes earnings; it doesn’t stop the rising costs happening,” IATA chief economist Brian Pearce said, commenting on the hedging strategies.

The airline industry is heading for rising fuel costs as crude oil prices surge, and the weakest of the European airlines may not make it through the winter, Michael O’Leary, chief executive at Europe’s largest budget carrier Ryanair, said last month.

According to Platts data and IATA, the average jet fuel price ended the week to May 25 at US$91.50 a barrel, down by 2.6 percent week on week, but up by 44.6 percent compared to the same week last year.

By Tsvetana Paraskova for Oilprice.com

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