“Raised Prices, Reduced Capacity”: Airlines Taking A New Direction As Oil Prices Climb

With oil prices peaking at a four-year high, Reuters reports that carriers are deploying multiple tactics in order to mitigate costs. This includes decreasing passenger capacity, increasing ticket fares, retiring older, less-fuel efficient craft and finally, even deploying fuel hedging tactics.

Increasing operating costs and spiking fuel prices are seeing many carriers decreasing their capacities, increasing ticket fares, retiring older aircraft and even employing fuel hedging tactics in order to deal with peaking oil prices, Reuters reports.

The news agency reports that oil prices are at their highest for four years, with Brent crude fetching around $76 per barrel. This is a 50 per cent increase on last year’s prices.

Offering his comments to Reuters, Christoper Luxon, Air New Zealand‘s chief executive, said, “At this point with rising fuel, you control costs, raise prices and you may have some fall off in demand and reduce capacity. I think we are seeing pricing move up internationally and certainly yields come up as well.”

However, while some carriers are opting to deploy hedging strategies, not all airlines agree that this is the best tactic for controlling their costs. According to the news agency, both Delta Air Lines and Emirates have opted not to hedge, even in the face of rising fuel costs.

Brian Pearce, chief economist with the International Air Transport Association (IATA) explained that, “It [hedging] stabilizes earnings; it doesn’t stop the rising costs happening.” IAG boss Willie Walsh commented, “We take a simple view that hedging is about buying time; it gives you time to address volatility.”

These spiking fuel prices are also seeing carriers jettison older, less efficient craft for more modern and fuel efficient planes such as the A320neo and the A330neo, the 737 MAX, the A350 and the 787.

Offering her insight, Mylène Scholnick, principal at consultancy firm ICF, said, “Fuel is definitely an issue and it is eating into profitability. When fuel comes down, the airlines keep aircraft longer, so we had seen ages pushed to 28, 30 years. Now with fuel back up, it won’t bring down the retirement age drastically but will stabilize it at around 25 years.”

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