Airlines’ expenses soar

Newsroom 30/06/2008 | 16:16

The rise and fall of the price of oil on the international market and the fluctuation of the US dollar have affected not only gas, energy, transportation and food bills this year, but also airlines' costs. Austrian Airlines Group, which operates scheduled flights from Romania to six destinations, estimates that by the end of the year the additional cost of kerosene will exceed EUR 100 million.
Company officials told Business Review that at an average price of USD 709 per ton of kerosene last year, total expenses for jet fuel reached EUR 530 million, 17.5 percent of total costs. In the first quarter of this year, Austrian Airlines Group spent EUR 109 million on jet fuel. “Based on the current price of kerosene and the level of the US dollar, the Austrian Airlines Group calculates that its additional costs for kerosene will reach EUR 130 million more this year than calculated,” said officials from the firm's corporate communications.
Despite the soaring fuel prices and weakened market environment, Lufthansa officials say they were able to compensate for almost any fuel costs caused by the increase in fuel prices.
“Last year, the overall fuel outlay for Lufthansa Group was about EUR 3.9 billion. For this year, Lufthansa expects its fuel expenses to rise to about EUR 5.6 billion, representing an approximate 40 percent rise in fuel costs,” said officials from the German airline.
Other important players on the market say the fuel price fluctuations have not influenced their business. Krassimir Tanev, head of sales at SkyEurope Airlines, told Business Review the Slovakian company had the advantage of operating a fuel efficient aircraft fleet and the impact was lower than on the airlines flying ageing aircraft of 10 or 15 years.

Tricks to reduce costs
The challenges that high oil prices pose are a burden with which Lufthansa has so far coped lucratively by implementing a wide range of measures.
“First of all, Lufthansa follows a very structured hedging policy since kerosene is one of the biggest cost factors for all airlines. In terms of volume, the Lufthansa Group has a fuel requirement of over eight million tonnes of kerosene per year,” said company officials. Fuel hedging seems to have paid off for Lufthansa: in the past 17 years in which the firm has used the strategy, it has generated net hedging results of more than USD 2 billion, according to company information.
Austrian Airlines Group has also taken strategic measures to reduce fuel costs.
“With our current measures, we hedge 20 percent of our annual jet fuel volume. Also, a wide range of internal optimization processes, including weight reduction measures, aircraft loading and various others have been introduced,” said Austrian Airlines Group officials. According to them, an internal working group ‘Fuel Safe Board' regularly evaluates measures to reduce fuel consumption.
Airlines have also announced significant investments in a more fuel efficient fleet. Lufthansa officials said that last year the German company had invested EUR 1.1 billion, from the total sum invested of EUR 1.4 billion, in the purchase of new aircraft.
“The modern fleet, maintained with state-of-the-art technology, currently uses an average of just 4.4 liters of kerosene to transport one passenger 100 kilometers. The fleet will become even more fuel efficient with the arrival of the new Lufthansa Airbus A380 in 2009. The A380 will be the first 3-liter aircraft in Lufthansa's fleet,” said company officials.
Low cost carrier easyJet has also thought how to reduce costs. “We will accelerate our fleet rationalization, improve crew efficiency by 10 percent by 2011 and reduce fuel burn by 3 percent per year,” said Peter Voets, easyJet marketing manager for Austria, Switzerland and Eastern Europe. According to him, in order to reach the company goal to improve revenues easyJet has introduced Speedy Boarding Plus and increase partner revenues from hotels and car hire firms.

New routes, new prices
Although airlines are making the necessary investments in fuel efficient fleet and taking action to reduce costs, fuel price fluctuations will still impact on the cost of air travel.
“Currently, we do not plan to reduce the number of flights or similar measures. We only partly pass the high jet fuel costs on to our customers by a kerosene surcharge. On short- and medium flights, it is currently EUR 24. On long haul flights, the surcharge is EUR 92,” said Austrian Airlines Group officials.
Lufthansa officials add that the current booking situation is stable and there are currently no plans to reduce flights, but “will continue to monitor oil prices and will make any future adjustments to the fuel surcharge dependent on further trends in the price of jet fuel.”
SkyEurope officials say that they have not recently initiated an increase in the fuel surcharge, but began charging passengers for their checked baggage in April and plan to raise mid-range prices. “The passengers will pay only for the checked baggage. The charge is EUR 7 per flight if paid when booking or up to EUR 20 if paid directly at the airport. Our overall taxes and charges even with this fee are 15-20 percent lower than our competitors' and the prices are much more competitive,” said Tanev. According to him, American Airlines has implemented the same fee as well for a benchmark.
The SkyEurope official also said that the company was planning to increase its operations, including in Romania, and its number of destinations, most probably from March next year. The low-cost company's aim is clear: “To replace the legacy carriers on the markets where we are competing with them.”

By Dana Ciuraru

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