Airlines under pressure from soaring fuel price

Wed 18 August, 2004
By Noah Barkin

PARIS (Reuters) - Europe's largest carrier Air France-KLM has joined rivals in raising its ticket prices to offset soaring jet fuel costs, but a leading bank has questioned how effective the surcharges will be in protecting airline profits.

Citing high oil prices, Citigroup Smith Barney lowered its earnings forecasts for all of the European airlines it covers and slashed its target price and stock recommendation on Air France.

Assuming an average Brent crude oil price of $40 a barrel for the rest of 2004 and $37 next year, the bank lowered its 2004 operating profit and net profit forecasts for the industry by almost 30 percent and 60 percent, respectively.

Air France AIRF.PA said on Wednesday it was raising its ticket prices by up to 12 euros (8 pounds) per flight leg, while the company's Dutch subsidiary KLM AIRF.AS said it would impose a fuel surcharge of an average 3 euros per coupon for all fares as of September 1.

Earlier this week Germany's Lufthansa LHAG.DE said it was increasing prices by 2 euros on domestic flights and 7 euros per leg for long-haul travel.

British Airways BAY.L and Hong Kong's Cathay Pacific 0293.HK are making similar moves and Singapore Airlines SIAL.SI said on Monday it was considering a surcharge as well.

Citigroup analyst Andrew Light said the moves would help European airlines with a high proportion of long-haul, cargo and premium traffic.

But he predicted that overcapacity in the leisure segment and on short-haul routes meant that airlines would have trouble generating additional revenue on routes within Europe.

"Weaker airlines will get weaker," Light wrote in the note. "At the same time, capacity plans are likely to be scaled back by stronger airlines and older aircraft are likely to be grounded."

OIL PRICE AT NEW PEAK

Oil prices surged to a fresh peak of $47 a barrel on Wednesday after a new threat by rebel militia against Iraqi oil facilities. U.S. light crude rose 26 cents to $47.01 a barrel after a 93-cent jump on Tuesday. London Brent was up 15 cents to $43.14 a barrel.

Jet fuel is the second-biggest cost for airlines after labour and accounts for 10-20 percent of operating expenses. Worries about the impact of high oil prices have weighed on airline stocks this year.

On Wednesday, European airline stocks were mostly lower, with British Airways down 2.4 percent at 216 pence, Lufthansa off 2.2 percent at 9.1 euros and Air France up 1.2 percent at 12.4 euros.

While leading network carriers have responded with a series of surcharges, discount airlines like Ryanair RYA.I and easyJet EZJ.L have stubbornly resisted raising ticket prices, partly due to cut-throat competition in that segment resulting from a wave of new entrants into the market.

Back in June, Ryanair warned of a "bloodbath" during the winter season, which only the "lowest cost" airlines would survive.

Citigroup suggested that the shake-out could go beyond the low-cost sector, with high fuel prices threatening weaker mainstream carriers like Alitalia AZPIa.MI and Swiss SWIN.S , whose new Chief Executive said on Tuesday he was taking a hard look at all of the carrier's routes.

Air France said the increase, of 2 euros per leg on domestic flights and 3 euros on medium-haul European and North African flights, would apply to all tickets issued as of August 24.

On long-haul routes, where fuel accounts for a larger expense item, the carrier is introducing a surcharge of 12 euros per flight, with the exception of flights to and from French overseas territories, which include Martinique, Guadeloupe and the Reunion Islands, where it will amount to 10 euros.

The airline said the surcharge would be dropped once Brent crude oil prices return to below $35 a barrel for over 30 consecutive days. Back in May, Air France introduced a 3 euro fuel surcharge.

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