Business

Friday April 11, 2008

Aviation sector struggling with rising fuel costs

By LEONG HUNG YEE



PETALING JAYA: While some airlines struggle to cope with record oil prices and weakening economic growth, others have been forced to halt their operations.

The latest casualty, Oasis Hong Kong Airlines, was the fourth carrier to shut down operations worldwide in less than two weeks after a 75% increase in fuel prices over the past year.

Analysts said fuel was one of the main cost components (about 30% of total operating costs) of the aviation industry. They said the uncertainty pertaining to the direction of oil prices going forward would continue to drag the share price performance of aviation stocks.

Oasis, which began flying in October 2006, ceased operations on Tuesday, stranding thousands of passengers in Hong Kong, Britain and Canada.

Chairman and founder Raymond Lee told Bloomberg that surging oil prices had affected the airline severely.

The long-haul low-cost carrier (LCC) said it had to stop flying because of higher-than-expected costs for fuel and aircraft.

Oasis had applied to Hong Kong courts for a voluntary liquidation and was seeking new investors, Financial Times reported yesterday, citing its chief executive Stephen Miller.

According to the report, at least five US-based airlines, including Skybus, Aloha Airlines and ATA, have collapsed in recent weeks, suffering the same fate as Maxjet Airways, which went into liquidation in December.

In Europe, Alitalia Airlines was reported to be teetering on the edge of bankruptcy and several leading airlines have issued profit warnings.

OSK Research Sdn Bhd analyst Chris Eng maintained that oil prices were detrimental predominantly to airlines.

“A US$1 per barrel difference will hit Malaysia Airlines by RM46mil in profits and AirAsia Bhd by RM10mil in profits,” he told StarBiz, adding that OSK Research had one of the most conservative views in the industry with an average of US$100 per barrel.

Eng said AirAsia X Sdn Bhd had a slightly different business model compared with Oasis as the former provided fewer frills and was currently not flying long haul. It has medium-haul flights to China and Australia.

“We think AirAsia X’s decision to delay its London flights till 2009 (owing to a shortage of A340s) is the right one due to high oil prices.

“We still think AirAsia X has the best chance of succeeding as a long-haul LCC although we are not certain anyone will succeed at all,” Eng said.

AirAsia X chief executive officer Azran Osman-Rani told Financial Times that “the Oasis example reinforces our view that a sustainable long-haul LCC model must stick to the core principles of high-aircraft utilisation and high-seat density to achieve a sustainable cost position.”

Meanwhile, AirAsia will start charging fees for checked-in baggage to cover higher costs.

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