Yesterday oil prices sank to USD110 per barrel, as the intensty of Hurricane Gustav weakened and concerns eased over the potential impact on oil installations in the Gulf of Mexico. The new environment is giving airlines some breathing space - but clearly not enough, as very few have moved to lower their fuel surcharges. In many cases, surcharges continue to rise, despite evidence that higher travel costs are hurting demand.

Of the region's privately owned carriers, only Australia's (comfortably profitable) Regional Express (Rex) has responded to the recent fall in global oil prices. In late Jul-08, it announced it would decrease its fuel surcharge by AUD4.00 per sector, effective 01-Aug-08.

Airlines owned by the state or operating in jurisdictions where government agencies regulate fuel surcharges have less control over their surcharges. This can be a blessing or a curse.

Taiwan's airlines are incurring heavy losses this year, but the Civil Aeronautics Administration has announced its airlines would reduce their international fuel surcharges by 20%, effective 10-Sep-08, reflecting lower world oil prices.

The Philippines Civil Aeronautics Board (CAB) approved sharply higher fuel surcharges for local and foreign carriers in late July, just as prices started to fall. Philippine Airlines, for example, raised its surcharge for Thailand services from USD44 to USD99 per sector and Japan services from USD69 to USD99.

Vietnam Airlines, a late mover into fuel surcharges (introducing domestic fuel surcharges ranging from USD3-11 per sector on 15-Aug-08), has already moved to lower those charges (by USD0.60 to USD1.84 per sector), effective 04-Sep-08, possibly as the government seeks to maintain tourism flows around the country, while fighting the country's raging inflation. Rival, Jetstar Pacific will reportedly announce plans to reduce its fuel surcharges in coming days.

Hong Kong's airlines, including Cathay Pacific, are subject to a cumbersome bi-monthly fuel surcharging system regulated by the Hong Kong Civil Aviation Department (CAD). The CAD recently approved Cathay and others to raise their fuel surcharges on 01-Aug-08 for two months, from USD21.90 USD29.60 per sector for short-haul, and from USD91 to USD118.50 for long-haul.

But, as a Cathay spokesman pointed out, there is a significant time lag of two to three months from the time the airline submits its fuel surcharge application to the CAD to the time the new surcharges become effective. According to the airline, "even after the latest adjustment, Cathay Pacific's fuel surcharges still lag far behind the surcharges imposed by other international airlines on comparable routes outside Hong Kong". Cathay added most major airlines currently levy fuel surcharges ranging from USD32 to as much as USD82 per short-haul sector and surcharges of USD150 to more than USD200 on long-haul flights are not uncommon, "while some even impose surcharges of more than USD260".

Cathay unveiled an unexpectedly large first half loss, which Chairman Christopher Pratt described as the "darkness before the dawn". Mr Pratt added the extent to which the airline can turn things around in the second half, "depends almost entirely on what happens to the price of fuel and our ability to increase fuel surcharges and ticket prices".

Japanese carriers continue to raise surcharges, despite warnings the increases are having a heavy impact on outbound travel. In late July, the Japan Travel Bureau Foundation forecast a 5.1% decrease in Japanese overseas travel in FY2008 to 16.4 million, but cautioned that if fuel surcharges continue to increase, a sharper reduction could be experienced. Within a month, newly profitable JAL Group had filed a request to the Japanese Ministry of Transport approval to increase its fuel surcharges by up to 33%, effective 01-Oct-08. The filing includes requests to increase surcharges to Europe/North America from USD255 to USD300 one way and from USD291 to USD346 one way on ultra long-haul services to Brazil. Rival All Nippon Airways has applied for similar surcharge increases.

Cathay Pacific and the Japanese carriers are clearly striving for higher yields, although Cathay is also chasing greater volumes, to feed its growing fleet and Hong Kong hub. Achieving both in a softening economic climate will be a challenge.

In India, airlines are holding the line with fares, despite a 16% reduction in oil prices in that country from 01-Sep-08. Newly recapitalised, but deeply loss-making SpiceJet has stated it would not reduce its air fares this month, adding the carrier needs at least two to three months of stability before it revises its prices. Market leader, Jet Airways, has been a strong proponent for further fare and surcharge increases to kick-start the recovery of the beleagured Indian airline sector, which is on course to report losses of USD1.5 billion this financial year.

Fuel surcharges have been helpful for the sector, but by no means a silver bullet. As Thai Air Asia CEO Tassapon Bijleveld, explains, "cutting costs is just a dream, especially when global oil prices keep rising steeply. In practice, it is too difficult to catch up with rising oil prices by raising air fares or fuel surcharge fees".

The LCC sector in particular is taking a different approach, using baggage and other "ancillary" fees as a way to raise revenue. AirAsia reported ancillary revenues delivered a stellar performance in the quarter ended 30-Jun-08, rising 60% year-on-year to account for more than 8% of total revenue in the period. According to AirAsia, its checked baggage fee, introduced in the quarter, has "helped to recover some impact of the higher fuel prices without undermining passenger demand".

The Philippines' largest airline, Cebu Pacific, lowered its free baggage allowance from 20 kg to 15 kg on 26-Aug-08, but introduced a new USD4.40 fare discount for passengers travelling without bags, effective 02-Sep-08.

Reducing fares and fuel surcharges could deliver greater traffic volumes in this environment. AirAsia stated it is benefiting from the current slower economic pace growth, "as more people are switching to lower cost travel option". The carrier says it is increasing its attractiveness to the corporate markets by offering a high frequency and expanding point-to-point network with low fares.

Meanwhile, Lufthansa Cargo reduced its international fuel surcharges by 3.8% from 21-Aug-08. Most other international cargo carriers also dropped their surcharges late last month, which signals some downward pressure could soon be applied to the international passenger market.

(en.AvBuyer.com.cn September 2, 2008)