How Increase in Fuel Prices are Effecting the Airline Industry Essay

How Increase in Fuel Prices are Effecting the Airline Industry - Essay Example This paper illustrates that since the fuel cost is one of the major costs incurred by the airlines therefore, the continuous increase in the fuel prices for the last years has been very threatening for all airlines. The major impact of increase in fuel prices is reflected in the increasing operating expenses and operating losses of airlines. Even the airlines which have been able to survive during this turmoil through their aggressive hedging options could not make targeted revenues. The rise in fuel prices has not only influenced the airlines individually but it has also influenced the entire world airline industry. According to International Air Transport Association, the profits of airlines will reduce with the rise in oil prices. The net profit of airline industry will be $8.6 billion in 2011 as compared to $16 billion in 2010. Moreover, if the unrest situation in Libya and Middle East persists then oil prices will further increase which will negatively influence the airline indu stry. At individual level, all airlines have been incurring huge losses for the last few years. The United States Passenger Airlines Industry faced a total operating loss of $4.3 billion in first three quarters of year 2008. According to the report of Government Accountability Office, the price of jet fuel was the major operating expense in 2008 and the major contributor of loss in 2008. The fuel costs were 25 percent of the total expense of the airlines in the first three quarters of 2007 however, in the first three quarters of 2008, the fuel costs became 32 percent of the total expense. In the third quarter of 2008, when fuel prices increased by 60 percent as compared to 2007, seven smaller airlines stopped their operations and many entered into bankruptcy. Today, the rise in fuel prices is continuously harming the operations of airlines around the world. Air India, the national carrier of India is facing a loss of Rs. 600 crore a month. The monthly income of the airline is Rs. 1, 100 crore whereas; the expense of airline was Rs. 1,700 crore and the increase in fuel prices was the major factor for this loss. According to Bob Herbst of AirlineFinancial, if the fuel prices remain at $105 per barrel in 2011 then the major eight airlines of the United States will have to pay more than $9 billion on fuel costs as compared to 2010. Moreover, these airlines will have to improve their revenues to breakeven to avoid any operating loss. On the other hand, a few airlines are also reporting the profits despite the high fuel costs. Korean Air reported a net profit of $29 million in second quarter of 2011 as compared to a huge loss during the same period in 2010. The airline claims that despite the high fuel prices, the airline has been able to make profits in the second quarter of 2011. Interestingly, the increase in fuel prices has also provided significant benefits to few airlines like Southwest Airlines. Southwest Airlines had the advantage over its competitors because of its hedged fuel prices. The company had hedged 70 percent of its fuel consumption at $51 per barrel when other airlines were paying $135 per barrel. However, the airline will ultimately go under the impact of high fuel prices because in 2012, the airline will be having only 15 percent of its total fuel purchases at $63 per barrel.