One of the contributing factors towards high inflation in the UK is high and rising oil prices – most of us have seen the effects of this with high prices at petrol stations. However, there are many other areas where high oil prices have had knock on effects and one particular effect is the costs to airlines. As a result, passengers will see a higher price. British Airways will be increasing its fuel surcharge on long-haul flights. The surcharge for economy seats is likely to increase by £10 per flight and for premium seats is to increase by £20 per flight. Nick Swift, BA’s chief financial officer said:
‘As customers will know form the price at petrol pumps, the cost of fuel has continued to rise significantly over the past three months. For us, fuel now represents over one-third of our costs and particularly affects our long-haul flights.’
The impact of high oil prices will undoubtedly affect airline profits, which are expected to halve this year. While International Airlines Group (IAG) has seen a rise in passenger numbers, costs have been rising faster and this may continue with further political unrest in the Middle East, as well as the recent natural disasters we have seen – in particular the concern about the nuclear power station. These concerns have led many airlines, including IAG to engage in hedging, where airlines try to protect themselves from rising fuel prices by agreeing the price they will pay for fuel several months ahead. There are undoubtedly risks of doing so, but with such high prices, this is a practice that airlines have engaged in. After all, fuel does represent over one third of IAG’s costs, so this price hike is hardly unexpected, but consumers will inevitably be affected.
British Airways increases fuel surcharge by £10 Telegraph, David Millward (5/4/11)
BA raises long-haul fuel surcharges BBC News (5/4/11)
BA passengers face fuel surcharge hike Sky News (5/4/11)
BA long-haul surcharge to go up The Press Association (5/4/11)
British Airways ups longhaul fuel surcharge Reuters (5/4/11)
Questions
- What are the causes of rising oil prices?
- What is the process of hedging? Are there any risks involved in it? Under what circumstances could hedging enable companies such as IAG to gain and lose?
- What impact is this surcharge likely to have on consumers? Who will it affect the most?
- What explanation is there for rising passenger numbers, yet falling profits for IAG?