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Namibia: Air Namibia Hedged Against Fuel Price Increases
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Namibia Economist (Windhoek)
25 July 2008
Posted to the web 25 July 2008
Windhoek
Air Namibia says the rapidly increasing prices of fuel may have had a negative impact on its financial projections but scheduled flights and operations have remained unchanged.
The airline's Business Development Executive, Xavier Masule, told the Economist this week that the corporation's confidence against the spiralling fuel costs is bolstered by the fact that it has hedged at least half of its fuel requirements against the increases.
To guard itself against such eventualities, the national carrier has implemented a Fuel Price Risk Management programme. Under this programme, 50% of the company's total fuel requirement is hedged or price-fixed with a hedging partner in order to protect it against the increases, said Masule
"The other 50% we try to mitigate (the price increase) through increasing fuel levies, which is a common practice worldwide," said Masule. However, he said, increase on the fuel levy may not be that effective as some passengers book their tickets well in advance and some may cancel their travel arrangements.
He said Air Namibia is constantly watching the fuel price increases, the market and the industry's reaction before making any decisions.
"Despite the fact that fuel prices have been very steep during the 1st and 2nd quarters of this year, Air Namibia has maintained its scheduled services, that is, the number of flights and destinations," said Masule.
He said Air Namibia is in fact expanding its operations by introducing additional flights and increasing its carrying capacities on popular routes such as the Johannesburg - Walvis Bay and Walvis Bay - Cape Town using a B737-500 aircraft.
In addition, the company would be introducing the larger A340-300 Airbus on the Luanda route every Friday starting from August 1, 2008. This will be in addition to two other weekly flights on the same route using a smaller B737-500 aircraft.
"These decisions are a result of a positive response to market demands. By introducing the Airbus, we have increased our carrying capacity by over 50% whilst at the same time cutting down on smaller aircraft schedules," he said. Masule however said the ever-increasing fuel prices did have a negative impact on the company's financial projections in terms of what it had budgeted for its fuel requirements. He said about18 months ago, fuel accounted for at least 32% of the company's total operational costs, but that has now risen to about 40%.
"Yes, we are feeling the pinch but we are just trying to manage the situation. Future profitability prospects of Air Namibia will be heavily compromised," said Masule, who added that the trend was the same world over.
A recent survey by the International Air Transport Association (IATA) says the steep rise in fuel and operational costs forced many airlines to scale down and weakened their business confidence during the first and second quarter of 2008.
During the survey, in which Air Namibia also participated, IATA found that only 10 % of the respondents expected to see an increase in profits next year while the majority, 70%, expected a decline in profits.
"Further expansion in developing markets (e.g. Asia), through new capacity continues to provide a boost to demand, though this market growth outside the US is more than offset by the unprecedented rise in fuel prices, which rose to $180 a barrel in early July," says IATA in its July 2008 Economic Briefing. Reasons for the recent fuel increases vary worldwide but the most common - that has also had an impact on Air Namibia - is the growing demand for petroleum, especially in new markets such as China and India, coupled to OPEC's production discipline.
Supply distortions as a result of natural disasters and geopolitical turmoil in oil producing counties such as the Iran, Iraq, Venezuela and Russia have also dented the supply chain. The further weakening of the US dollar against major world currencies has also had its own impact.
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"If fuel prices continue to increase and the other airline increase their fares or levies, then Air Namibia will have no option but to increase accordingly," said Masule.
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| Copyright © 2008 Namibia Economist. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections -- or for permission to republish or make other authorized use of this material, click here. | |||||||||||||||||||||||||||||
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