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UAE, GCC airlines seen cutting fares before July
January 27, 2015, 5:11 pm
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Time to pack your bags. The year 2015 may just be one of the best times for people to go for their dream vacation as holiday spending could get cheaper anytime soon. Airlines in the UAE and the rest of the Gulf Cooperation Council (GCC) countries are forecast to slash fuel surcharges on tickets by March or June this year, following the recent decline in oil and gas prices.

A number of airlines around the world, including Qantas, Virgin Australia, Emirates Airlines, Asia-Pacific and Japan Airlines have recently announced that they are reducing their passenger fares in 2015. Virgin Atlantic has dropped the fares on some routes by more than 50 percent, while Qantas has cut the ticket prices for Sydney to London by $416.

Gulf carriers

No price reduction has been implemented in the GCC yet, but one economist predicts that Gulf carriers are likely to implement fare adjustments in the next few months. “We can expect a reduction of fares by end of first quarter 2015, or by end of first half 2015, the latest”  said Alp Eke, senior economist at the National Bank of Abu Dhabi.

“The global airline industry is very competitive," said Eke. "The companies have very low profit margins. Once a couple of airlines with reduced operational costs start decreasing their fares, the other companies will have to follow in order not to lose market share. I believe the fare reduction will first start with GCC-origin airlines.”

The price of oil has dropped by more than 50 percent since June. The International Air Transport Association (IATA) has predicted that the falling cost of fuel could cause ticket prices to drop by 5.1 percent this year. Etihad Airways has not confirmed any plans to reduce airfares, but the company said they are regularly monitoring the price situation.

“Total ticket prices are made up of a combination of elements, including fuel surcharges. Etihad continuously monitors and adjusts total ticket prices to ensure that we are competitively positioned in the markets we operate and sell in,” an Etihad spokesperson said. Tim Clark, president of Dubai-based Emirates, had earlier been quoted as saying the airline has been studying the impact of lower oil prices since November and is likely to introduce new prices in April.

Hedging

However, the practice of “hedging” could prevent some airlines from lowering the cost of fares. By hedging, carriers lock in a price for fuel to insulate themselves from future cost increases. Airlines are still consuming oil purchased a long time ago, hence they are not currently benefitting from the price drop.

“Because of hedging, most airlines are paying too much, above the market rate, for oil at the moment. Soon, hedging practices will cease and after the losses are covered, we can expect a reduction,” said Eke. Oil consumption constitutes nearly a third of a typical airline’s operating expenses. According to IATA, airlines were forecast to consume last year around two billion barrels of oil at a cost of $200 billion, at $100 Brent -- which constitutes around 28.5 per cent of operational costs of a typical airline.

“Assuming the Brent average for 2015 is $55 and assuming 10 percent increase in consumption due to boost in trade and tourism, we can safely assume that cost of oil for global aviation industry will be at around $120 billion,” Eke added.

Lufthansa German Airlines, however, hinted it is not lowering its fares anytime soon. "The falling oil price is completely reflected on the effective fuel cost of Lufthansa only with a delay due to the weak euro versus the US dollar and due to hedging," said Karsten Zang, Lufthansa general manager for UAE and director for Gulf and Pakistan. "The strong increase of the fuel cost during the recent years could not be forwarded to the passengers to the same extent, despite the surcharge."

"According to the latest forecast, we are now expecting a lower fuel invoice for the Lufthansa Group (€5.8 billion in 2015; €6.7 billion in 2014). This level is positioned significantly above the cost five years ago. Our passengers spent 3.6 percent less for each ticket in average (yield decrease per ticket), the pressure on the yield remains high in 2015."

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