A relentless rise in jet fuel costs is cutting sharply into airline profits and ultimately passengers will have to pay the price.
Jet fuel prices in northwest Europe are currently around $330 (U.S.) a tonne, a level not seen since Iraq's invasion of Kuwait in 1990. And as the price of crude oil continues to rocket, jet shows no sign of relenting, leaving airlines to cope with a fuel bill almost double last year's.
To cope with volatile jet costs, many airlines hedge their fuel needs by trading on the oil derivatives market, buying jet swaps, crude or gas oil swaps or options when prices are low.
Bigger airlines can afford to hedge a larger proportion of their fuel cost expenditure. German airline Lufthansa said it has hedged more than 90 per cent of its 2000 requirements and 60 per cent for 2001 so far.
A trader at another major European airline said it aimed to hedge anywhere between 20 and 80 per cent of its needs. But the trader said raising ticket prices were currently the most effective way of dealing with the prohibitive cost of fuel.
"We have increased our fares twice, by about 3 per cent, and the cargo department by around 10-15 per cent," he said. "(That) is much better hedging than doing something on the paper markets."
Spokesman for the International Air Transport Association (IATA) Tim Goodyear said many airlines had done the same. "With operating margins of less than seven percent, (an airline) can't take high year on year cost increases without doing something to its prices," he said. "And scope for cost reductions in other areas must at some point be exhausted."
Despite hiking its fares by 3 per cent this July, Belgian budget airline Virgin Expresshas struggled with its crippling fuel bill. On Tuesday the airline, which is controlled by British entrepreneur Richard Branson's Virgin Group, posted a second quarter pre-tax loss of 6.4 million euros, compared to a pre-tax income of 5.1 million euros for the same period in 1999.
The airline said its fuel cost increase was effectively 91 per cent, the accumulated result of rising jet costs and a weakening euro/dollar exchange rate and said it had abandoned its hedging policy at the end of 1999.
"It is difficult to predict what oil prices are going to do," a spokesman for the airline said. "We hope that they will go down as soon as possible but it is a difficult call.
"In 1998 we entered into hedging for 13.4 million gallons of jet, with maturity dates between January 1999 and December 1999. Because the prices during 1999 rose so high, by the end of the year nobody expected it would go up any more."
The average price of jet fuel in 1999 was $172.12 a tonne, compared to $268.94 for the year 2000 to date.