Tue | Dec 6, 2016

Airfares to dip, thanks to oil slump

Published:Friday | December 12, 2014 | 12:00 AM

Flying could get cheaper next year as airlines say they will finally start passing on some of the savings made on plummeting oil prices.

Carriers are forecasting record profits for 2015 thanks to cheaper fuel and rising demand. As a result, they expect to cut the average ticket price by five per cent in 2015, excluding surcharges and taxes.

That may not be a big decrease considering that the price of crude oil has fallen 40 per cent since June, but is the most carriers can do for now, the International Air Transport Associated (IATA) said Wednesday.

The association, which represents 240 airlines, or 84 per cent of total air traffic, notes carriers are still stuck with contracts for fuel that predate the past months' price slump.

That's one reason why airlines have this year not cut ticket prices despite the oil price fall. In fact, as demand for flying remains strong, fares have been going up.

But things should start changing next year. That's when airlines' fuel costs will start reflecting the recent plunge in energy markets, says IATA's chief economist, Brian Pearce.

"It's going to be six months or so before airlines are seeing lower fuel costs, and at that point consumers are likely to see a fall in travel costs," Pearce told The Associated Press.

The airlines will still be making more money. They forecast record net profit of US$25 billion next year - well above the US$19.9 billion this year, the US$10.6 billion in 2013 and US$6.1 billion in 2012.

That is based on a forecast that the price of oil will average US$85 per barrel. On Wednesday, the US contract was trading below US$63 a barrel.

IATA's US counterpart, Airlines for America, declined to comment on where fares are headed, but expressed satisfaction with lower fuel prices.

"We're certainly hopeful that the cost environment and the demand environment will stay healthy" so airlines can invest in new planes and passenger amenities, said the US trade group's chief economist, John Heimlich.

Demand for travel has been so strong that airlines just haven't seen a need to cut prices. That approach has helped drive airline stocks higher as fuel prices have tumbled. But on Tuesday, shares of Spirit Airlines Inc. plunged 12.7 per cent - and other US airlines fell too - after the discount carrier said it saw signs that cheaper fuel was leading to lower prices on last-minute tickets.

Despite higher earnings, many airlines remain cautious about their finances as profit margins remain slim. Geneva-based IATA said margins are forecast at only 3.2 per cent, just up from 3.1 per cent in 2010.

Tony Tyler, director-general and CEO of IATA, said that even with the fall in jet fuel prices, the average profit would still amount to little more than US$7 per passenger per flight - well below other industries.

He noted that Starbucks, for example, has a declared profit margin of about 14 per cent.

"If that is the case, they will retain as much from selling seven cups of coffee as an airline will make selling an average ticket," Tyler said.

That's why airlines are taking advantage of a golden moment, in which fuel costs are falling just as demand rises.

Passenger traffic has been expanding by about 5.5 per cent per year for the past two decades, but IATA said it is expected to grow seven per cent in 2015.

North American airlines are expected to make the biggest profit next year - US$13.2 billion, from US$11.9 billion this year - but see only a modest increase in demand. Carriers in Europe are expected to see net earnings rise to US$4 billion in 2015 from US$2.7 billion this year, with demand roughly unchanged.

The highest growth in demand is forecast in emerging markets in Asia, the Pacific region, the Middle East, Africa and Latin America.

Asian airlines should see profits hit US$5 billion next year, bringing them back to 2011 levels, while the Middle Eastern ones should rise to US$1.6 billion from US$1.1 billion.

- AP