Airfares will fall next year as oil prices head south

Geneva: As oil prices head downwards, passengers will see airfares falling in 2012, according to a senior executive at the International Air Transport Association.

"Oil prices are heading downwards and with weaker markets that would be putting downward pressure on airfares," Brian Pearce, IATA's Chief Economist, told Gulf News on the sidelines of the IATA meeting in Geneva as the industry body lowered its 2011 and 2013 forecasts for the aviation industry.

In its latest profit outlook, IATA said the Middle Eastern carriers are expected to earn profits of $400 million (Dh1.46 billion), down from the previously forecast $800 million, as high fuel costs squeezed profit margins on the more price-sensitive long-haul traffic routes in the Middle East.

Cutting costs

Fuel prices are expected to account for 32 per cent of airlines' costs in 2012, Pearce said.

This year they accounted for 31 per cent.

"It's a greater proportion next year, and that's because, one, airlines are going to be looking to cut other costs and so fuel will rise proportionately. And the second factor is the impact of hedging. Airlines have been buying their fuel needs forward," he explained.

"So next year they will be paying prices that they paid this year for some of the fuel."

Effect of hedging

Explaining the effect of hedging, Pearce said it is really to delay moves in the fuel price.

"And now this will actually be working against airlines. Hedging sort of smoothes out the price changes, but it means that airlines won't see the full benefit of the fall in prices next year," he said.

Meanwhile, at an average oil price of $112 per barrel, the industry's 2011 fuel bill is expected to be $178 billion (up $2 billion from previous expectations), IATA said, adding that some relief in the fuel price would be expected.

"Based on oil at $85 per barrel, the fuel bill would be $183 billion and consume 31 per cent of costs," said Pearce.

He added: "The airfare is not going to go up in this environment. I think it's the opposite. We would say the fuel prices are too high. Given the state of the economy, you would expect to see oil prices lower at this juncture because there has been a squeeze on supply."

Asked how much lower he expected airfares to be next year, Pearce said: "While I cannot say how much lower ... in terms of passenger yields, our expectation is that airlines on average won't see any improvements at all in their yields after an improvement of about four per cent in 2011."

"But next year, no more gains — firstly, because fuel costs are not increasing but more importantly because there is no pricing power, as economies are weakening and capacity is growing," he said.

The Middle Eastern carriers are moving into a more difficult and challenging environment, according to Pearce.

"Oil prices are still relatively high, that means fares have to be high. And that's affecting the price sensitive segment.

"Obviously, a lot of the Middle East business is in getting long-haul passengers connected to the region's hub.

Difficult

"Having said that, the capacity growth has slowed quite a bit [for the region's carriers] although there are a lot of aircraft on the order books.

"But in terms of available seats, the region's carriers have not been growing at a pace than the traffic that's been achieved," he said.

Further calling the environment "difficult" for the region's carriers, Pearce said: "We have seen airlines in the region struggle."