/ 22 May 2008

Airline shares hit as soaring fuel bills dent profits

The world’s top airlines warned on Thursday that soaring fuel prices were hitting profits, prompting some to increase fares, and global leader American Airlines announced thousands of job cuts to counter higher costs.

Airline stocks fell sharply in Asia and Europe after stock in American’s parent AMR shed a quarter of their value as investors fretted over the cost of jet fuel, which is most airlines’ single-biggest expense.

The airline industry is struggling to cope with oil prices that have surged 170% since the start of last year as economic uncertainty threatens growth.

”[The oil price] is going to actually send some [smaller] airlines into bankruptcy,” said Nick van den Brul, analyst at Exane BNP. ”The best position for an airline is to have a good hedge already in place … a euro exposure to the dollar and also the ability to cut costs.”

The cost of jet fuel traded in Singapore has risen by more than half this year alone and analysts expect more cost cutting, particularly among United States carriers as an economic slowdown puts people off travelling.

American said it would begin charging passengers to check in their bags and will retire 75 aircraft from its ageing fleet.

Air France-KLM, the world’s biggest airline by revenue, warned that soaring fuel prices would slash operating profits this year, knocking its shares down nearly 9% to two-month lows even as it reported higher 2007 operating profit.

Chief executive Jean-Cyril Spinetta warned that Air France would have to brace for a €1,1-billion ($1,73-billion) rise in fuel costs this year. He said the airline would implement a €150-million ($236,4-million) cost savings plan.

”The current year is set to be challenging, with the oil price and the global economy creating significant uncertainty,” Spinetta said in a statement.

Severe impact

In Australia, Qantas Airways increased air fares for the second time in less than a month in response to record fuel prices. It will put up the cost of an international flight by 4% and domestic fares by about 3%.

Japan Airlines, Asia’s biggest carrier by sales, said it needed to raise its fuel surcharge as it could no longer absorb cost increases on its own.

”We try to absorb it ourselves but it’s beyond our ability to absorb all of it and we need to transfer [some] to our customers,” JAL president and chief executive Haruka Nishimatsu told Reuters in Singapore.

JAL shares fell 2% in a positive Tokyo market

Fitch Ratings said in a report this week that high fuel costs and potentially weakening demand will force Japan’s two dominant airlines, JAL and All Nippon Airways, to focus on strict capacity discipline and tighter non-fuel cost controls.

Air Canada chief executive Montie Brewer said on Wednesday that fuel costs were consuming a growing share of income and would likely dent demand for air travel.

”The severity of it will impact customer demand. We’ll see how much the customer can absorb and still plan on travelling,” he told reporters.

Brewer said every $3 rise in the price of a barrel of crude oil adds $75-million to Air Canada’s annual fuel costs. He said fuel accounts for 31% of the airline’s operating costs, up from a quarter last year. – Reuters 2008