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Business

Rising fuel prices shake airlines

Airlines worldwide are flying into some heavy turbulence caused by soaring kerosene prices. Passengers could be hit with higher airfares as carriers seek to offset their rising fuel costs.

Plane refueling

Filling up is no joy for airlines these days

The steadily rising cost of jet fuel is putting a damper on earlier airline enthusiasm about business this year.

Earlier growth projections spurred by a recovering global economy are being undermined by instability in the Middle East and North Africa, causing oil prices and subsequently jet fuel prices to shoot upwards.

The International Air Transport Association (IATA) has downgraded its profit forecast for the global airline industry to $8.6 billion (6.2 billion euros) from the $9.1 billion that it projected in December. That represents a 46 percent fall from the $16 billion that airlines made in 2010.

'Fragile' situation

"The biggest shift in our forecast is the price of oil," IATA general director Giovanni Bisignani warned in a speech earlier this month. "In December the consensus was for $84 per barrel. Today that has moved to $96. For each dollar that the oil price rises, airlines have to recover $1.6 billion added costs."

If those prices prevail for 2011, the industry's fuel bill will jump to more than $22 billion, wiping out last year's record profits.

Bisignani referred to the sector's situation as "fragile" and pointed to one of its structural weaknesses: a historical profit margin of just 0.1 percent. "We are constantly walking on a tight rope of very thin margins," he said. "There is no buffer against shocks. So everything that hits us has the potential to knock us over."

IATA director general Giovanni Bisignani

IATA's Giovanni Bisignani is concerned about fuel prices

One way airlines try to protect themselves against rising fuel costs is hedging. The technique, which essentially caps the price for fuel for months or years in advance, can keep a carrier's per-ton fuel bill more or less constant. Air France, British Airlines (BA) and Lufthansa are among the many larger airlines that maintain hedged positions.

Raising fares, of course, is an obvious response to rising costs. Numerous airlines including BA have already increased their fuel surcharges or general ticket prices, while others plan to follow suit.

Variable air fares

Las Vegas-based airline, Allegiant Air, is entertaining a new idea that could catch on with its gambling-friendly clientele.

The airline envisions offering travelers two options: One would allow them to purchase a fixed-price ticket. The other would allow customers to buy a "variable" fare that would give them money back if fuel costs fell after they bought the ticket - or require them to pay more if fuel prices rose during that time.

American Airlines is also considering variable fares as an option.

The US Department of Transportation, however, has responded to developments by proposing a new consumer protection rule that would prevent airlines from increasing prices after purchases are made.

The best advice for travelers under the current situation seems obvious: If you think you see a good deal, grab it because it may not last long.

Author: John Blau
Editor: Sam Edmonds

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