Last Updated 27 Jul 2020

Fuel Prices and the effect on Airlines

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Here are many airline companies that are closing down because of losses incurred. According to May. J. C (2003), the airline industry is in a “perilous condition” because two of the major industries were in bankruptcy, reporting $10 billion losses in 2002. Although some of the airlines who have been able to make profit foresee a very bleak future. May. J. C (2003) goes on to explain that airlines are affected because of many interconnected events that have occurred.

Decline in revenue because of the 9/11 attacks in America, carriers have been trying to reduce costs as much as possible but high fuel prices, increased security, high insurance costs have all combined to give an under performing economy. Fuel prices are increasing because there is high demand but very less supply and with uncertainty of the peace in Middle East and the situation in Venezuela, especially the weather, has caused stocks to reduce. His has caused oil inventories to decline. The airline industry has no surplus cash to depend on, some of them have exceeded their borrowing capacity and even in the future there is no relief.

This situation has continued since then, many airline companies thus building on the cash levels amassed. Costello. T (2006) clearly explains the ripple effect that is caused. If prices of unleaded gasoline is up then extra surcharge needs to be added on every trip a limo or plane has to make. Be it metal shops, EDS Waste or small businesses everybody feels the pinch of the increasing fuel prices. They cannot absorb and suffer losses so what they do is pass it on to customers. Surcharge on jet fuel is even more that is why the customers end up paying a higher price for the ticket.

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Due to the effect in Western countries China has an immediate reaction. He Shan (2008) mentions that jet fuel prices in China are determined by many factors such as “factory prices”, “synthesis purchasing cost disparities” and many different “price variables”. China makes price adjustments according to the international prices of oil. Oil price fluctuations in the market have caused China Aviation Oil to increase the oil prices although they are still have not raised their fuel surcharges sufficiently to offset the rising prices.

The main challenge for China is insufficient international flights to alleviate any pressure in the near future. Reed. D (2008) in the article says that high crude oil and refined jet fuel prices have caused U. S. carriers to incur high losses, plenty service cutbacks and even job cuts. The airline companies are doing their best to overcome the losses by grounding planes or even selling them, mergers, buyouts and increasing service charges to the travellers. Routes have been changed or shifted; cheaper contract providers are being brought in, many even have sold ancillary units and business.

Many in flight services and comforts such as meals and pillows have been withdrawn. Companies even began to use technology that helped cut costs on additional labour. All this in an effort to stay afloat and not go bankrupt due to price rise as well as competition that is threatening many businesses. Such a crisis in the airline industry makes even the investor wary making things even more difficult for companies to stay afloat. Many airlines are looking to depend on their liquid assets, but lots of them are running out of options. It is not always easy to stay optimistic for almost a decade.

At the same time there are many companies that have already made some hedge fund planning which is paying them to keep their businesses alive. At the end of it when the crisis is over, only the toughest get to survive, worse things have happened and the airline industry is known to have overcome all crisis, however only time shall tell.

Works Cited

May. J. C (2003). Oil Supply and Prices Statement of James C. May President and Chief Executive Officer Air Transport Association of America before the Committee on Energy and Natural Resources U. S.

Senate Hearing on Oil Supply and Prices, February 13, 2003 http://www. airlines. org/government/testimony/ATA+Testimony+-+Statement+from+ATA+President+and+CEO+Jim+May+on+Oil+Supply+and+Prices. htm Costello. T (2006). The ripple effect of high fuel prices. http://www. msnbc. msn. com/id/12483817/ He Shan (2008). Raised jet fuel price dismays airlines. China. org. cn. http://www. china. org. cn/english/business/240905. htm Reed. D (2008). High-priced fuel scares airlines. USA TODAY http://www. usatoday. com/money/industries/travel/2008-03-24-jet-fuel-costs_N. htm

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