With oil prices hitting new highs and predicted to rise even further in the next year, what will be the impact on cheap air travel?
Only last week analysts forecast that oil could rise to between $150 and $200 a barrel within the next 2 years as demand for oil outstrips supply. The famous low cost airline easyJet has warned that more airlines could be pushed into financial failure this year and next as a result of these rapidly increasing fuel costs. The company made the announcement as it issued a mid year financial report in which it blamed fuel costs for a cut in its forecast profits.
But what do they mean that more airlines will be pushed into financial failure?
Well, the effect of the latest price hikes may not fall on all airline companies straight away. Many companies take out contracts with fuel suppliers where they are guaranteed a proportion of their fuel at a fixed price. These deals are called hedging and easyJet has such a deal whereby 40% of its fuel is priced at the equivalent of $75 a barrel which is well below the current price of around $122 a barrel. But of course these deals are only for a fixed period and once they expire the airlines are at the mercy of the market again.
Inevitably prices will have to rise to recover the extra costs of fuel but it will all depend on when these contracts expire and which companies have to increase their costs first that will bring the first fuel casualties. If one company can keep on pricing on the basis of a lower fuel cost they will gain the ticket sales. This appears to be the strategy of easyJet. If they can hold off increasing prices maybe their competitors will fall by the way side and they can grab a bigger slice of a less competitive market in which they can set their prices higher.
British Airways has already introduced fuel surcharges to offset the additional costs and no doubt other airlines will follow. So for those of you that have pre booked flights this summer you could well find an additional surcharge winging its way to you. For those that haven’t booked maybe bargains can be had from those airlines that have hedged their fuel prices and can afford to keep their prices lower than their competitors.
One thing’s for sure we’re all going to face higher costs to travel as a result of high oil prices. It’s just a matter of when and by how much.