The Slippery Cost of Doing Business- Could Rising Fuel Prices Impact Long-Haul Low Cost?
In every sense, oil is a slippery substance. For airlines, it’s a major cost item and difficult to control and that means it’s even more slippery when the price slides up over a short period of time. With fuel prices having increased by 37.5% over the last year, and 10% in the last month, should airlines be alarmed?
Fuel prices are now at their highest level since early 2015 and speculators suggest that the price could nudge further north in the coming weeks as additional sanctions are placed on Iranian supplies. The last three years have seen the aviation industry record some of the its highest profit levels, and in particular drive the emergence of long-haul low-cost airlines. So, will the higher oil price lead to a slowing, or even stalling, of long-haul low-cost?
Long-haul routes make up only a small proportion of the low-cost networks. In percentage terms, these sectors account for 1.7% of all low-cost services operated so whilst a growing segment, they are still hardly a significant proportion of the market. Growth has been strong with the numbers of sectors in excess of 2,500 nautical miles increasing by just under 40% in the last four years. That equates to 41,000 flights a year - or 112 additional services a day.
Partly offsetting any increase in fuel cost are the advances in aircraft technology which are delivering very real savings in operating costs. Reportedly, cost savings achieved from operations of aircraft such as the A350 and B787 are in double digits for most operators. In the last four years these two aircraft types have seen a near threefold increase in sectors operated which will undoubtedly have been translated into significant cost savings for the airline operators.
In all, 7% of long-haul low-cost flights are operated by the B787 while the A350 is yet to be used by such airlines. Norwegian is the single largest user of the B787 with 16,411 flights scheduled in 2018, followed closely by Scoot with 15,485 planned services. Collectively, the two airlines account for 78% of the planned B787 movements across the long-haul low-cost airline sector.
A quick look at the industry metrics from the IATA February – March Financial Monitor suggest that consumer demand continues to be strong, load factors as high as ever, there is cautious capacity growth and EBIT margins remain broadly unchanged year-on-year. All of this would suggest that from an airline perspective there is probably sufficient demand in the market to pass on at least some of the long-term increase in fuel prices. The impact of the current rise in fuel cost has been calculated to have a negative impact of some US$36.7 billion on the industry; crudely (excuse the pun) that equates to a US$1.5 billion cost increase for every dollar increase in the price of fuel.
Another perhaps more consumer-focussed way of looking at the increased cost would be to calculate the additional cost spread across just over 4 billion travellers, the number of global air passengers in 2017. Then we are looking at a direct pass-through cost of approximately US$9 per passenger to cover the increased operating cost across the industry. While yields are always under pressure, the combination of high load factors and the ever-growing stream of ancillary revenues mean that bridging that gap could be a realistic challenge for many long-haul low-cost operators.
Oil will always be that slippery customer that wriggles and moves in the wrong direction. It would seem, however, that compared to previous occasions the market environment is that bit stronger this time around and the current increases in fuel cost may not be too daunting for many. We should still expect some squealing in some quarters!