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Higher oil prices to cut into airline profits [08-03-2011]  
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Local airlines, along with other carriers worldwide, will see higher fuel costs eat into their first-quarter profits, as political unrest in Libya continues to push oil prices to new highs not seen in over two years.

Crude for April delivery was quoted at US$106.45 a barrel in electronic trading on the New York Mercantile Exchange yesterday, with the jet fuel price hitting close to US$130 per barrel.

“Airlines will immediately feel the (impact of) rising jet fuel prices. Judging from that, the first-quarter results will be dampened by rising fuel costs but our base jet fuel assumption price will only be increased if high oil prices prolong,” said a local bank-backed analyst.

OSK Research Sdn Bhd said in a report last month that fuel represents 30%35% of airlines' expenses and that earnings could be at risk, as a US$1 increase in its base jet fuel price assumption of US$110 per barrel would hit earnings by 0.6%7.2% over the next two years, assuming no further surcharges are implemented.

A Maybank IB Research aviation analyst told StarBiz that there were essentially two ways of looking at rising jet fuel prices increased costs and reduced profits.

With the jet fuel price above US$100 a barrel, he said that every US$10 per barrel increase on a full-year accounted basis would increase Malaysia Airlines (MAS)'s cost by RM320mil and AirAsia's cost by RM138mil.

“So from a purely cost perspective, an increase of US$20 per barrel would wipe out MAS' operating profit target of RM600mil for the current financial year,” the analyst said.

MAS' operating profit target ranges from RM300mil to RM600mil for its current fiscal year ending Dec 31, 2011.

However, the analyst said, in reality airlines would increase their fares to cushion the higher fuel costs.

He said that an average air-fare increase of 5% for MAS would translate to some RM500mil in additional revenue.

“For 2010, the MAS data showed that ASK (available seat kilometre) was 49,623 million and RASK (revenue per available seat kilometre) was 19 sen. For 2011, I have assumed that ASK will be 53,000 million with a 5% increase in RASK of 19 sen, which will translate to roughly RM500mil,” the analyst said.

Meanwhile, AirAsia (for Malaysia operations only) had ASK of 24,355 million last year with RASK of 16.36 sen.

For this year, ASK is projected to grow to 26,200 million and with a 5% increase on RASK of 16.36. This translates to an additional RM214mil.

OSK Research said that no airline would be spared from rising fuel costs, although Singapore Airlines (SIA) commanded pricing power on its fuel surcharge in the premium segment, while budget carriers could offset the adverse impact via higher ancillary fees and their “no fuel surcharge” marketing gimmick.

Budget carriers such as AirAsia and Tiger Airways would be more affected by the higher jet fuel price as they may be more reluctant to impose fuel surcharges and would rather raise ancillary fees to cushion the impact, OSK Research added.

It said that budget carriers marketing claims of “no fuel surcharge”, despite the higher airfares, would be favourable in drawing passengers away from full-service carriers, which proved to be successful back in 20072008.

It added that MAS had a higher likelihood that its performances for financial years 2011 and 2012 would continue to be in the red.

Last week, the International Air Transport Association (IATA) downgraded its airline industry's profit outlook for 2011 to US$8.6bil from US$9.1bil estimated earlier due to higher fuel costs.

IATA director-general and chief Giovanni Bisignani said that political unrest in the Middle East had sent oil over US$100 a barrel, significantly higher than the US$84 per barrel that was used as the assumption in December.

“At the same time, the global economy is now forecast to grow by 3.1% this year a full 0.5 percentage point better than predicted just three months ago. But stronger revenues will provide only a partial offset to higher costs. Profits will be cut in half compared with last year and margins are a pathetic 1.4%,” he said.

Local airlines' shares ended lower yesterday, with MAS shedding six sen to RM1.81 and AirAsia down four sen to RM2.48, as oil prices continue to escalate. However, the budget carrier's share price has gained some 60 sen in the last six months, with its current market capitalisation standing at RM6.88bil.

MAS' share price, on the other hand, has been on a downtrend in the past six months, losing 40 sen, and its current market capitalisation is at RM6.05bil.

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