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Oil Has Grounded Airlines

After the last increase in early June (by 10%-13%), the price of jet fuel in Russian airports reached 36,000- 37,000 rubles (about 1,000 Euros) per ton. This should increase the price of tickets for domestic flights by an average of 10%. But even now more than 90% of the population cannot afford to fly. Permanently growing ticket prices will make flights even less accessible to the public.
by Staff Writers
Moscow (SPX) Jun 18, 2008
In 2001, the world's airlines sustained a record aggregate loss of $13 billion as a result of a terrorist attack on the World Trade Center in New York City. After such a shock, many people sharply cut down on their air travel.

But this year, the record may be beaten for a strictly economic reason. Prices on jet fuel are skyrocketing as fast as oil. Austrian Airlines, the Austrian national carrier, was the last to report problems on June 10.

It expects to lose up to 90 million Euros by the end of this year, although in the past year it made a profit of 3.3 million Euros.

Something is definitely wrong with oil prices. At the end of the first week of June, they jumped by $16 to reach $139 per barrel in less than 36 hours. The balance of supply and demand has vanished altogether.

Although now the price has stabilized at $135 per barrel, many experts predict that it will rise to $150 per barrel in the near future. The International Energy Agency (IEA) bluntly admitted that it is registering more and more signs of falling consumer demand, especially in the aviation industry.

Airlines all over the world have become the last victims of soaring oil prices because of the permanently growing demand for oil of industrial consumers in China and India. At its annual conference in early June, the International Air Transport Association (IATA) estimated a potential aggregate loss of airlines by the end of this year at $6.1 billion, which is the biggest one since 2003.

But this estimate is based on the price of $135 for a barrel of oil. Every increase in the price by one dollar is raising the aggregate loss by $1.6 billion. Eventually the record loss of 2001 may be beaten by the end of this year.

In the IATA's estimate, since the start of this year, higher aviation fuel prices have forced 24 airlines to discontinue flights or file for bankruptcy to protect themselves against creditors. Ironically, in the last year, the world's airlines started overcoming the crisis into which they were plunged by 9/11. For the first time in eight years, they received an aggregate profit of $5.6 billion.

They worked very hard to achieve this. In the last six years, they improved the energy effectiveness of flights by 19%, and reduced non-fuel costs by 18%. But these achievements were reduced to naught by the accelerating growth of oil prices. Since 2006, they went up three-fold, and doubled again in the last 12 months.

Most airlines do not have any additional resources to deal with the financial crisis. They can only react by increasing ticket prices. Fewer people can afford to buy expensive tickets; airlines have to reduce the number of flights, which further aggravates their financial status.

Airlines in Europe, America, Asia and the Pacific are sounding alarm. The world's biggest airline in the passenger traffic, the French-Dutch Air France-KLM warned in late May that its profit from its profile operation may decrease by one third because of soaring oil prices.

One of the leading American companies, American Airlines, announced practically at the same time, that in order to cope with growing fuel costs, it will stop using old aircraft, cut thousands of jobs, and reduce the number of flights, which will lower its passenger traffic.

British Airways, which received a record profit last year, is also going to put part of its aircraft fleet out of operation. It warned that current oil prices would reduce to zero its profits from flights. The South Korean Korea Air and the Australian Qantas have also cancelled a number of flights. Free services are being gradually cut down by all airlines.

But it is clear that these measures will not be enough to redress the situation. IATA calls the current crisis extraordinary, and predicts that it can entirely change the configuration in the world market of air transportation.

IATA implies by that further global consolidation, to achieve which airlines should largely give up obsolete national regulation.

Russian airlines have also been affected by global trends. Oil prices in Russia are much lower than global ones, and last year jet fuel cost much less here than in the rest of the world. But the oil processing market in Russia is highly monopolized, and having sensed mega profits, Russian oil companies sharply raised prices on jet fuel.

Since the start of this year, prices have gone up by 70%, and doubled since last September, having matched the global ones.

Russian oil companies prefer to play themselves on such a tempting market. Most Russian airports are served by one monopoly fuel supplier. It belongs either to a vertically integrated oil company or the airport itself. Since the end of the last year, fuel suppliers have been raising fuel prices for airlines almost every month, saying that they have to pay more to oil refineries.

After the last increase in early June (by 10%-13%), the price of jet fuel in Russian airports reached 36,000- 37,000 rubles (about 1,000 Euros) per ton. This should increase the price of tickets for domestic flights by an average of 10%. But even now more than 90% of the population cannot afford to fly. Permanently growing ticket prices will make flights even less accessible to the public.

In early spring, analysts were quite optimistic about the prospects of domestic airlines. They were hoping that continued growth of population incomes would raise the scale of passenger traffic. But they proceeded from the last year's figures, when the increment in passenger traffic registered a record (since 1991) 18%. But last year, prices on jet fuel were half as low.

A scenario took a negative turn. Like in the rest of the world, skyrocketing prices on jet fuel and tickets are bound to lower the demand for passenger flights in Russia.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

Source: RIA Novosti

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