Airline fares to remain stable despite rising oil prices

Costs are manageable and demand for air travel is strong to offset small increases in fuel costs

By MARK RAO / Pic By TMR file pix

Airline operators are not looking at fare increases to mitigate rising crude oil prices, said analysts.

This is because costs are manageable and demand for air travel is strong to offset any small increases in fuel costs.

Over the past year, crude oil prices on the Brent index rallied from US$50 (RM196.50) per barrel to above US$73 per barrel, largely supported by OPEC-led production cuts and geopolitical uncertainties.

While consumers have felt the rising costs at the pump, airline fares in Malaysia remain stable despite higher crude prices pushing up fuel costs for airline operators.

TA Securities Holdings Bhd senior analyst Tan Kam Meng said this is due to the comparatively “cheaper” oil price environment today against the time when oil prices were above the US$100 per barrel level.

“Typically, an airline operator will introduce a surcharge on fares to manage its cost and prevent the higher fuel prices from affecting its bottomline,” Tan told The Malaysian Reserve (TMR) when contacted.

“This was done when crude oil price was at US$100 per barrel, but at the current price level, it is a lot more manageable for airlines, so they don’t have to pass on the cost to the consumers.”

Given the current oil price environment, he said it is unlikely that Malaysian carriers will increase their rates.

Malaysia Airlines Bhd, AirAsia Group Bhd, AirAsia X Bhd, FlyFirefly Sdn Bhd, Malindo Airways Sdn Bhd and MASwings Sdn Bhd are the six Malaysian-based carriers operating today, of which only AirAsia and AirAsia X are listed.

Tan said AirAsia has been enjoying strong growth and load factors, while continuing to manage cost pressures at the same time.

“In terms of cost discipline, AirAsia has the lowest cost operating model today. If the company has to increase fares, it will be an industry-wide phenomenon affecting other local peers as well,” he said.

For the 2017 fiscal year (FY17), the low-cost carrier grew its revenue by 14.1% yearon- year (YoY) to RM9.71 billion, despite incurring higher fuel expenses at RM2.82 billion — up 23.1% YoY.

The budget airline also noted an 11% increase in passengers carried, while load factor was higher at 88% from 87% in FY16. From FY12 to FY15, load factor was stable at 79% to 81%.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said Malaysian airline operators have utilised technology and ancillary services to help offset rising fuel costs.

“While jet fuel prices have always been the main driver for airfare, airlines have been quite agile and strategic when it comes to cost efficiencies,” Mohd Afzanizam told TMR when contacted.

“The use of technology for its various services and efforts to increase ancillary services would, to a large degree, offset the rising jet fuel cost.”

He added that airlines’ hedging strategies against volatility in fuel prices coupled with stronger demand for air travel have also kept rates down.

“The competitive nature of airlines businesses coupled with operational efficiencies, as well as further contribution from ancillary services should keep ticket fare stable for now.”

According to Malaysia Airports Holdings Bhd’s monthly traffic snapshot, airports in Malaysia registered a 4% YoY growth in passenger traffic to 8.6 million in March, supported by the growth in international traffic by 11.8% to 4.5 million passengers.

Domestically, traffic was down by 3.5% at 4.1 million passengers over the same period.

Tan said this could be down to local airlines allocating more capacity for international passengers due to the higher yields provided by this demographic, on the back of rising travel demand.

“There is still domestic demand for air travel, but there is possibly a lack of capacity to accommodate for it — this could be reflective of why we saw a drop in domestic traffic.”