24 December 2014

Why Air Ticket Prices won't Come Down just yet? (Dec 2014)


World's oil prices have been tumbling down substantially since June 2014 to current level of US$60/barrel. As most of us already knew, when this kind of news appear, airlines industry tends to be one of main beneficiaries. However, why cheaper oil price this round doesn't really translates into cheaper air ticket price?


The Oily Factor...
Oil is the biggest variable cost for airlines, often representing 1/3 or more of their operating expenses. Hence, the profit of an airline is very much depends on oil prices movements. And, due to this very important factor, many airlines are trying hard to minimize this risk until they found one strategy called --- hedging.


However, there is a flip side to this hedging strategy, which is if they bet on the wrong direction. Normally, an airline would hedge against the rising oil prices up to certain months. It can be three months or six months for example. This strategy works well if oil prices didn't fluctuate much, helping airline to estimate and control their costing.

Good sometime may be Bad also...
But, it's a totally different story if oil price tumbles as much as 40% within few months time as what we are experiencing currently. Instead of hedging against the rise of oil prices, the hedging costs is eating into the benefits of cheaper fuels. That's the reason why air ticket prices just won't come down yet until the hedging contracts is over.


I believe all of the airlines have this kind of hedging strategy. How competitive are they in the next few months would depends on how many % of fuel they already hedge. Let's wait...



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