Triple-digit oil and business travel

March 29, 2011

A lot has happened since March 2, when IATA director-general Giovanni Bisignani, commenting on global airlines’ oil-hit net profit margins, referred to the estimated 1.4 percent 2011 figure as more worthy of a charity than an industry. Even that measly increment, Bisignani added on March 29, is “under considerable pressure.”

As we reported on the 2nd, IATA’s forecasts assume an average oil price of $96 per barrel for Brent crude this year. Every $1 increase in the price of a barrel, said Bisignani, adds $1.6 billion in costs to airlines, which are estimated to have hedged 50 percent of their fuel purchases this year.

Even up to a fortnight hence, the industry was all set up for a great year; IATA informed us on March 16 that “rising business confidence points to further gains in the months ahead.” But thanks to developing North African unrest, Brent crude has risen by 20 percent this year; a barrel for April delivery now goes for approx. $110.

The Middle-East uprising and the Japan crisis has also of course reduced bums on seats: February’s international traffic is down by about 1 percent, IATA said today (March 29), with would-be travellers delaying or postponing their journeys to affected areas.

But how have business travellers reacted? Premium travel, according to IATA, remains on an underlying growth rate of around seven percent, though the airline body also warned that the situation in Japan could temporarily cut demand for premium-class tickets.

However, if a triple-digit oil price settles in for a long stay, all bets are off.

Surveying how business travel will be affected by a three-figure oil price, a report by the Global Business Travel Association Foundation (GBTA) released on March 15 looked at three scenarios: oil prices remaining above $125, $150 and $200 per barrel throughout 2011, with prices returning to a baseline level by 2013.

Despite the potential for these exorbitant prices to decrease spending and total trips, the research, GBTA says, showed that spikes in oil prices would not derail biztravel growth in the US. Here’s what their research concluded:

  • Oil priced at $125 bbl would result in a reduction of nearly $5.8 billion or 1.5 percent in total U.S. business travel spending and roughly 700,000 trips forecast between 2011 and 2013.
  • Oil priced at $150 bbl would result in a reduction of nearly $6.9 billion or 1.8 percent in total U.S. business travel spending and roughly 1.8 million trips forecast between 2011 and 2013.
  • Oil priced at $200, the extreme shock scenario, would result in a reduction of almost $9 billion or about 2.5 percent in total U.S. business travel spending and roughly 2.7 million trips forecast between 2011 and 2013.

Discussing the findings, Michael W. McCormick, GBTA’s executive director and COO, said: “Business travel is more resilient than the conventional thinking might suggest… So, although an oil price spike would be very painful for the travel industry, essential travel would clearly go on and in fact the number of trips taken would continue to increase.”

Though this research may bring a glimmer of hope to aviation execs, what will actually transpire is far from certain. As BGC Partners analyst Howard Wheeldon told Reuters on March 17, “Airline customers decide what the tipping point is based on what they are charged to fly… I see that point coming if oil reaches anything above $130 a barrel.”

A quick scan of our latest reports charts the current pain across the world’s carriers. Finnair said its full-year 2011 results would remain in the red unless there was a substantial improvement towards the end of the year in the oil price and the situation in Japan.

Qantas raised domestic and trans-Tasman airfares to offset rising fuel costs. “Since international fuel surcharges and domestic fares increased last month, jet fuel prices have increased by a further 15 percent, to more than US$134 per barrel today,” the Australian flag carrier’s Chief Executive Alan Joyce said on March 24. Singapore Airlines also raised fuel surcharges.

Stateside, US Airways said its fourth-quarter system capacity would be down as much as 2 percent from previously expected levels, and Delta said it would scale back capacity both internationally and in the US in the second half, continue retiring less fuel-efficient planes, while cutting capacity to Japan by 15 percent to 20 percent through May. Southwest Airlines Co has raised ticket prices.

Air Canada will suspend unprofitable route, and continue to adjust fares and fuel surcharges in response to market conditions.

Malaysian Airline System (MAS) managing director Azmil Zahruddin best summed up the situation in a Reuters interview on March 17, “Demand is still not as strong as what it was… I think with what happened in Japan, the indirect ramifications are uncertain yet.

“And there are still question marks over short- to medium-term demand. That coupled with high fuel prices is something to be concerned about.”

But it’s nice to end on a happy note. Planemakers are reaping big rewards from the rising-fuel-price environment; the one thing all airlines want right now is new, fuel-efficient aircraft.

We reported last week that aircraft leasing firm International Lease Finance Corp ordered 100 narrow body jets from Airbus and 33 from Boeing. Other bulk buys this month came from Lufthansa, Turkish Airlines, Air China and Cathay Pacific.

It remains to be seen as to whether the front sections of these sparkling new planes will be fully occupied.

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see