Some airlines cut fuel levy

Others retain surcharges because they had hedged their fuel at higher prices

This article was first published on Jan 15, 2015

Air travellers may be close to reaping the savings from lower crude prices that motorists have been enjoying at the pump.

Some global carriers are starting to cut fuel surcharges, and therefore fares, but so far, Singapore Airlines (SIA) and SilkAir are not among them.

The two local carriers complied with an order last week by the Philippine authorities to remove fuel surcharges for tickets sold from Jan 8 onwards, but have not extended similar cuts to other flights.

One reason some airlines have not budged is that they use hedging to lock in a guaranteed amount of fuel at a fixed price, so they may not benefit fully from cheaper oil for some time.

For instance, SIA has said it has hedged 65.3 per cent of its fuel needs at US$116 a barrel for the six months to March. Fuel costs account for up to 40 per cent of its operational costs, analysts say.

If airlines have locked in at higher fuel prices, they may be reluctant to lower fares. Benchmark Brent crude closed at US$46.59 a barrel yesterday and is tipped to fall to as low as US$40 a barrel.

In response to queries, an SIA spokesman said: "It should be noted that while fuel prices have come down in recent months, the fuel surcharge continues to provide only partial relief against high operating costs from the price of jet fuel."

Philippine regulator Civil Aeronautics Board ordered 27 foreign airlines operating in the country to scrap their fuel surcharges effective from Jan 8.

Aside from that, airlines that are reducing fuel surcharges include Qatar Airways, Japan Airlines (JAL), Cathay Pacific Airways, Virgin Atlantic and some China carriers, including Shandong Airlines and Xiamen Airlines.

But many other airlines have not followed suit. The International Air Transport Association (Iata), representing about 250 airlines, last month forecast that falling fuel prices and global economic growth meant the industry will post a collective global net profit of US$25 billion (S$33.4 billion) this year and report its strongest profit margin in more than five years. Iata has also predicted a 5.1 per cent fall in airfares from 2014 levels this year.

In Singapore, Mr Seah Seng Choon, executive director of the Consumers Association of Singapore, said there are no regulations requiring airlines to align fuel surcharges with oil prices.

But he "strongly urged" airlines to pass on the savings to consumers, and if not, to "step forward and justify why fuel surcharges are still kept at the present level". He said the rationale for fuel surcharges, when oil prices exceeded US$100, is no longer valid. "Airlines have a moral obligation to review the need for such fuel surcharges, or at least reduce the amount," he said.

Mr Mark Clarkson, a Singapore-based business development director at OAG Aviation, said: "It's also a question of competitive pressure and who blinks first. Depending on which markets airlines are operating in, and what level of competition they face, their strategies will be influenced on a case-by-case basis."

Asked how long it would take, he said: "There is no standard for this - some may adjust it immediately to gain competitive advantage and forcen others to follow, while some may be forced to hold for as long as possible, given high hedging. Public pressure certainly has some influence."

Cathay Pacific, which reduced fuel surcharges for fares from Jan 1, said: "Additional fuel surcharges over time were only able to offset about half of the incremental fuel costs. That means we continue to absorb part of the additional fuel costs."

JAL is cutting fuel surcharges on all international fares from Feb 1. Qatar Airways last week said it will cut surcharges, but did not say by how much and when, Reuters reported.

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