Era of low airfares is over, expert says

Spelling the end of the era of lower airfares, airlines worldwide will be forced to raise fares by an average of 5 per cent this year, succumbing to a 50 per cent hike in fuel prices over the past year, according to the chief economist at the aviation trade body International Air Transport Association (IATA). "We are looking at a fare increase of at least 5 per cent, owing to a surge in oil prices. "We have seen a five per cent increase in unit costs because of the rise in jet kerosene and that is with the [airline] industry having hedged 50 per cent of this year's fuel bills. "Had they not done that, it would have been twice the impact. So we are going to see that five per cent reflected in airfares," Brian Pearce, IATA's chief economist, told Gulf News on the sidelines of the recent IATA annual general meeting in Singapore. He added that there would be some variation in the market but that is sort of a general guide for the airfare increase that IATA is looking at for this year, raising the possibility of a repeat of 2008 when fuel prices sent ticket prices spiralling. The Middle Eastern carriers such as Emirates and Etihad Airways, meanwhile, have been packing the summer period with discounts and offers in an attempt to attract customers. "In weak market conditions, airlines try to stimulate demand by discounting and reducing fares. But it is a really difficult environment at present to be able to do so," Pearce said, adding that the industry has witnessed around 50 per cent rise in fuel costs this year, "and fuel is an airline's main cost". "We have already seen some airfare increases this year by airlines," said Pearce, adding that even airlines that have 50 per cent of their fuel bills hedged are going to face the fare rise of "at least 5 per cent". Having increased airfares by about 15 per cent already this year, Emirates is anticipating a revision in airfares for 2011 too if the fuel price continues its climb, according to Emirates President Tim Clark. "We may have to tend to our costs if oil prices go up to $150-$160 per barrel levels. And as long as the fuel stays at $100 per barrel plus, the whole industry is going to face real problems," he warned. "Emirates is probably one of the most efficient airlines operating — on all terms. And we are finding it difficult. So if we are finding it difficult, the industry will be finding it difficult." Fuel accounted for about 34 per cent of the airline's costs last year, according to Clark. Echoing Clark's view is Qantas chief Alan Joyce. He said the Australian carrier, having "gone through now a number of fare increases and fuel surcharge increases", could not rule out further price increases as the entire industry is dependent on jet fuel prices. "The increases have still not recovered the additional fuel costs," he said. Supporting their views, IATA's Pearce said: "With no sign of a significant decline in an oil price that is staying stubbornly above $100 a barrel, airlines are fighting to stay profitable and have pushed up ticket prices in order to recoup costs. They have had no choice but to hike fares." He added that the geo-political unrest in the Middle East and North Africa coupled with the recent shocks suffered by Japan, further add to the industry's woes.