Colin Packham analyses whether derivatives are saving the airline industry from the soaring cost of oil
With oil prices increasing to new highs everyone is feeling
the pinch. But, even more than most, the travel and transport
industries are being dealt blow after blow as oil prices
continue their upward trend. However, while the rising cost of
fuel presents a danger to many in the industry, derivatives
could come to the rescue.
But to what extent has the aviation industry embraced the
use of derivatives to offset the oil market highs?
Oil has been the subject of record settlement highs
throughout 2008, culminating in yet another peak reported on
June 27 when New York Mercantile Exchange
(Nymex)’s August WTI hit a record $142.26 a barrel
before easing back to close at $141.64. Intercontinental
Exchange (ICE) also recorded a new settlement high in its
August Brent contract, which surged to $142.13 a barrel, before
edging back to $141.10.
This rise in the price of oil has been nothing short of
disastrous for the airline industry. Michael Waldron, oil
markets analyst at Lehman Brothers says: "High oil prices are
the number one enemy of airlines." Meanwhile, International Air
Transport Association says the global airline industry may lose
a record $6.1 billion this year.
Indeed, United Airlines says its 2008 fuel bill is on
schedule to hit $9.5 billion if current prices are sustained.
This is more than $3.5 billion higher than last year.
Chicago-based United and other airlines stress that they are
under severe financial pressure.
"Since oil prices passed $135 a barrel, jet fuel costs have
sent the whole airline industry reeling," says a United
United says that 950 pilots, which constitutes about 14% of
the total team, will lose their jobs as spiralling fuel costs,
coupled with weak consumer spending, hit earnings.
The job cuts are in addition to existing plans to eliminate
1,600 positions from the firm’s workforce. Staff
numbers must be scaled back as United reduces the number of
services it offers, says the company.
"As we take actions to enable United to compete in an
environment of record fuel prices, we must take the difficult
but necessary step to reduce the number of people we have to
run our business," said the carrier.
However, United Airlines is not alone. Many carriers have
made a series of radical moves to survive, including charging
passengers to check in their first piece of luggage and raising
the price of airfare tickets or fuel surcharges.
A number have already collapsed, including UK airline
Silverjet and budget carrier Oasis Hong Kong, while
Canada’s leading airline, Air Canada, says it will
cut 2,000 jobs by the end of the year as it reduces capacity to
deal with rising fuel costs. Airline giant Intercontinental
also announced 3,000 job cuts in June.
Michael O’Leary, chief executive of budget
airline Ryanair, has also warned that most of
Europe’s airlines will go bust if oil prices
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