Skip to main content

A Swissport employee Christopher Gonzalez monitors a fuel line as he refuels a Southwest Airlines plane at the Oakland International Airport.Justin Sullivan/Getty Images

As political turmoil threatens to spread in the Middle East, the economic effects of rising oil prices are already reverberating around the corporate world.

Fears of the upheaval in Libya taking hold in other countries is fuelling uncertainty over just how painful spiking oil prices will be to a global recovery that's hanging by a thread. Bellwether sectors with exposure to oil prices are facing the pressure head-on, making swift adjustments to their outlook and passing along rising costs to consumers.

Airlines, which were just starting to feel confident enough to raise ticket prices amid an upturn in travel demand, are facing higher jet fuel expenses. Travellers are being hit as they book overseas trips for the summer holidays as the carriers' fuel surcharges soar on international routes.

Investors are seeking safety from rising inflation in gold, up about 10 per cent since late last month. But even in the gold sector, fears are growing that higher oil prices will pinch profits.

And as General Motors posted its highest annual profit since 1999 on Thursday, shares dropped due to fears of what escalating prices at the pumps will do to a fragile auto industry that's just beginning to recover.

In the travel sector, fuel surcharges on selected overseas flights have steadily climbed by one-third over the past year. With volatile energy markets, some travellers will take a wait-and-see attitude, hoping oil prices settle down to keep dreams alive for overseas vacations.

But for other consumers who haven't booked their summer vacations yet, the higher ticket prices will prompt some Canadian passengers to rethink their itineraries, perhaps switching to domestic, U.S. and Caribbean destinations instead of making trips to Europe and Asia, industry experts say.

West Texas intermediate crude for April delivery slipped 82 cents (U.S.) to $97.28 a barrel Thursday, but is still up 187 per cent from $33.87 in late 2008.

As oil prices surpassed $147 a barrel in July, 2008, many consumers opted for shorter-haul trips, postponing their long-haul vacations. In business travel, executive-class cabins have gradually regained their lustre with frequent fliers, but the fear in the aviation industry is that the fragile economic recovery can't be sustained under the pressure of a prolonged period of lofty oil prices.

"If it turns out to be a short spike in oil prices, then things will be fine," said Manny Fontenla-Novoa, chief executive officer at British-based tour operator Thomas Cook Group, which operates 93 planes in its airline division.

But if West Texas oil ascends to $120 a barrel and stays at that level for several months, the pain could force weaker carriers to go out of business, he warned in an interview Thursday. "Oil at $120 will put pressure on inflation around the world. You would see erosion in travel and some airlines in financial difficulties."

Some markets will perform better than others in a pricey oil environment, Mr. Fontenla-Novoa said, noting economies remain relatively healthy for now in Canada, Germany, France and Scandinavia, though some British residents will be tempted to stay closer to home this summer, given reduced consumer confidence within Britain's hard-hit economy.

After the recession in 2009, air service between Canada and Europe boomed last summer. While higher fuel surcharges are expected to crimp overseas travel demand in 2011, the strengthened loonie and extra seat capacity earmarked for transatlantic routes should offset some of the damage from increased airfares.

"With the Canadian dollar being strong against the pound and euro, there is going to be a big focus still on travel to Europe," said Michael Friisdahl, CEO at Thomas Cook North America.

British Airways, Air France and Australia's Qantas Airways are among the carriers that boosted their long-haul fuel surcharges earlier this month, prompting Air Canada to follow suit on international flights.

On many overseas routes, fuel surcharges are up sharply over the past year. A Toronto-Paris round-trip booking made Thursday for July travel imposes a $300 (Canadian) fuel fee, up 34 per cent from a $224 surcharge for a similar reservation in 2010. International base fares have climbed only slightly, with carriers wary of scaring off consumers if tickets prices go too high, too quickly, analysts say.

For fresh bookings this week, including taxes, the Toronto-Paris trip in economy class will cost in the range of $1,300 to $1,400 round-trip this summer on a commercial carrier, depending on travel dates, up roughly 10 per cent from similar advance tickets in 2010.

Within North America from May to September of 2008, Calgary-based WestJet and Montreal-based Air Canada charged a $20 one-way fuel fee for short-haul flights, $30 for medium routes and $45 for long ones. The carriers, which imposed the surcharges after West Texas oil exceeded $110 (U.S.) a barrel, will be under pressure to reintroduce fuel fees within North America as oil prices rise, analysts say.

For now, Canada's two largest airlines are boosting their base fares in an attempt to help offset their escalating fuel bills. Raymond James Ltd.'s domestic airfare index shows that a WestJet basket of lowest-available ticket prices, booked Feb. 15 for late March travel, rose 46 per cent from the same period in 2010. The domestic airfare index at Air Canada jumped 34 per cent, according to the Raymond James sampling.

Mumbai-based Jet Airways announced on Thursday that it will hike its domestic fuel fee in India on Saturday. United Airlines and American Airlines elevated their domestic airfares in the United States earlier this week, while Malaysian low-cost carrier AirAsia is cautioning that it will need to introduce a surcharge soon, if oil prices stay high.

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 3:19pm EDT.

SymbolName% changeLast
AC-T
Air Canada
-0.61%19.52
GM-N
General Motors Company
+1.77%45.38

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe