Business Daily (Nairobi)
Wangui Maina
5 June 2008
Surging oil prices are causing headaches to businesses and individuals. The scenario is making nonsense of the shopping lists and travel budget as the crude oil price gushes up and down in what experts have said defies market fundamentals.
Locally, public service vehicles operating in towns have varying prices determined by the time of travel- a tradition that is heavily entrenched and follows the demand and supply rule. But going by the prices of air tickets, domestic air travellers are yet to feel the pinch of the recent surge in fuel prices across the globe.
A flight to Mombasa with any of the local carriers still costs the same as it did late last year. On some routes, air tickets cost less than last year's prices thanks to intense competition that has come with the entry of new players in the market, especially the budget airlines. The fair pricing, however, is expected to come to an end soon as operators begin to share some of the additional costs with travellers.
Industry insiders say the pressure for ticket price revision is also mounting because a slump in the tourism sector has reduced cabin occupancy ratio, especially in flights to destinations such as Malindi, Lamu and Masai Mara.
Fly540, the low-cost airline that took the domestic market by storm from early last year, is one of the operators that are feeling the heat from fuel price surge.
"We are constantly looking for ways to save on our fuel bill," the airline's operations director, Nixon Ooko, said. East African Safari Air Express's commercial director, George Kivindyo, said the airline is spending 80 per cent of its revenues on fuel. "Passenger tickets are still viewed as fairly expensive, making it difficult for us to raise them," Mr Kivindyo said.
With competition having reached fever-pitch in a market that is underpinned by reduced passenger volumes, air operators are constantly looking over their shoulders at what their rivals have on the cards before making any move.
However, Eutychus Waithaka, the chief executive officer of the Kenya Association of Air Operators (KAAO), says airlines cannot hold on to current ticket prices for too long. "They have to pass on these costs to passengers to cushion themselves from losses," he said.
But some industry players fret that an increase in fuel surcharge could lead to reduced market share for the concerned operators if the move is not uniform.
A fuel surcharge is paid in form of taxes by customers on their plane tickets. The fee was introduced to cushion airlines from the turbulence of global petroleum markets.
Over the past decades as international passenger volumes grew robustly, major airlines have had no problems adjusting the surcharges to reflect the increase of fuel prices.
Early this week, British Airways, increased its fuel surcharge for the third time this year. The revised charges apply to all its long-haul flights forcing passengers to dig deeper into their pockets for tickets.
Kenya Airways has also hinted they would be charging high for tickets. Mr Titus Naikuni, the Kenya Airways chief executive, alerted passengers that tickets would cost more with the impending revision of the surcharge.
"Passengers just have to bear with us," he said at a recent investor briefing. During a recent visit to Kenya, Virgin Atlantic president, Sir Richard Branson, told journalists that his airline will spend up to £250 million (Sh30 billion) on fuel this year. "We have absorbed some of the costs but eventually it will be passed on to the customer," he said.
But adjusting fuel surcharge is not all that airlines are doing to cushion themselves from high fuel costs. Most operators have taken to hedging - the signing of contracts with dealers to buy fuel at an agreed price over a specified period regardless of on goings in the market.
By hedging over 50 per cent of its fuel, Kenya Airways was able to reduce its fuel bill in the last financial year ending March 2008, by 1.7 per cent to Sh15.62 billion. Domestic carriers, however, do not have the financial clout to apply this mechanism. The carriers mainly pay per consumption, making it more expensive for them compared to the bigger operators.
Airlines that hedge are either billed for their consumption at a given price or purchase huge stocks at a given price. "Due to our small size we do not hedge, but it is the way to go in the future," Mr Ooko said. The airlines pay depending on the agreement made with the oil company with some being billed at the end of the month while others have to pay a deposit or pay in advance, especially for scheduled operators.
This costs some of the airlines millions of shillings with one airline paying anything from $450,000 to $600,000 (Sh27 million to Sh37 million) per month on their scheduled flights.
Towards the end of last year, the airlines were paying about $0.56 (Sh34) per litre of jet fuel, this increased to $0.62 (Sh38) earlier this year. Today, the figure is more than a dollar (Sh62).
However, most of these airlines are able to save on fuel consumption due to the make of their planes - propelled planes or jets. "Our saviour is that our fleet is turbo-propelled, which are not as thirsty for fuel like jets," Mr Ooko said. Propelled planes consume less and an airline like Jetlink, which operates both types, uses them interchangeably depending on how the plane is loaded.
Fly540 on the other hand is set to usher in nine new turbo propelled planes from September, which are expected to help the airline to save on fuel costs. The airlines have also been forced to temporarily close down operations on some of the routes due to the slump in tourism, a major determinant of the air transport business.
Fatma Mwendwa, operations manager for Safarilink which operates on most of the tourist routes, told Business Daily they had suspended operations on certain routes to avoid increased costs. The airline, just like other players, also reduced flights on some routes.
Lamu, Malindi, Masai Mara and Samburu are some of the routes operators have avoided as they rely mainly on basic business and domestic travel to Kisumu and Mombasa.
However, it is not only Kenyan airlines that are battling with rising fuel costs; it is a global issue.
Fuel costs usually constitute over 30 per cent of any airline's operational costs. In the past few months, the cost of jet fuel has risen to $160.7 ( Sh9,963) per barrel according to International Air Transport Association (IATA). A year ago the fuel cost was 90 per cent cheaper.
Five airlines have already closed shop in the US due to the huge costs that have led to massive losses. More could follow suit.
UK airline, EoS, which offers business class flights between New York and London, recently applied for Chapter 11 bankruptcy protection. It joined Aloha Airlines, Champion Air, ATA Airlines and Skybus Airlines who have already shut down.
"Twenty four airlines in total have already collapsed into bankruptcy in the last six months," IATA's director general and chief executive, Giovanni Bisigani, told a Press conference earlier in the week as he announced depressed profits for the industry in 2008.
"For every dollar that the oil price increases, we add $1.6 billion to costs," he said.
Airlines are also looking at various cost-saving measures such as job cuts. Just last month, Kenya Airways sent home 23 managers in what it termed as a cost-saving measure.
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