Oil below $35 to impact airlines' revenues

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With oil price having dropped to $35 a barrel levels, airlines will see their revenues come under pressure and yields (the average revenue per mile per paying passenger) disappearing, besides airfares being revised downwards in 2009, according to industry experts.

"Oil at below $35 a barrel is not that bad news for the airlines. But this would result in airlines revising their ticket prices downwards in 2009, which would mean that revenues are going to drop and the yields will be lost," Kareem Murad, Vice President - Research at Shuaa Capital, told Emirates Business.

Explaining the rationale behind such a move, he said: "When oil prices went up to the levels of $147 a barrel, the airlines' operating costs also went up substantially, and when the oil price fell, their operating costs came down too."

"However, just because revenues would be lower, it does not mean that the airlines' profitability will be lower as well in 2009, because on the other hand cost has dropped as well," he added.

Gulf airlines, on the other hand, seem to be in line with their strategies. "The price of oil is constantly changing, it always has and always will. We are happy that the price of oil has come off record highs. We are happy with our hedging position and are in a strong position to take advantage of lower market prices," said Iain Burns, Etihad AirwaysEtihad Airways' Vice-President - Corporate Communications.

EmiratesEmirates, meanwhile, did not reveal specific impact of sliding oil prices on its revenues and profits. "We have been monitoring fuel prices closely, and since August 2008, we have implemented two rounds of fare reductions in the UAE, reflecting the softening fuel prices," the airline's spokesperson said.

Regarding the impact of falling oil prices on airline's expansion and future investment, the spokesperson said EmiratesEmirates' plans for growth "remain unchanged".

Welcoming the drop in oil prices, Sharjah-based budget carrier, Air ArabiaAir Arabia's spokesperson, Housam Raydan said: "Mid-range price of oil is always better for the economy and for airlines. Air ArabiaAir Arabia enjoys one of the world's lowest operational costs and we will remain price competitive in 2009."

All said and done, airlines will all in likelihood, fall back on their old behaviour, according to Addison Schonland, a US-based aviation analyst with Innovation Analysis Group.

"They will cut fares to add load factor. But of course that does not help with profitability. To recover costs airlines must focus on revenues -- cost are pretty much cut to the bone," he said.

"Oil price below the levels of $35 is a two-edged sword - it is great for airlines' costs which were thrown out of whack by the oil spike. But prices have fallen because of falling consumption, which is driven by dropping consumer confidence the world over. So even though costs have dropped, demand for travel may drop off even faster," he added.

By Shweta Jain

© Emirates Business 24/7 2008