OPEC Cut May Call Time on In-Flight Free Drinks

EghtesadOnline: Some of Asia’s marquee airlines that spoil passengers with free alcohol and in-flight entertainment may soon have to kick the habit.

News ID: ۷۷۲۰۰۶

06 December 2016

The on-board giveaways, famously rolled out to every passenger in the 1970s by Singapore Airlines Ltd., will be unsustainable for some carriers after OPEC’s production cuts announced last week drive up the cost of fuel, according to aviation analysts. Other options include cutting unprofitable routes, retiring gas-guzzling aircraft and raising fares, Bloomberg reported.

The deal reached by the Organization of Petroleum Exporting Countries on Nov. 30 couldn’t have come at a worse time for carriers such as Cathay Pacific Airways Ltd. and Singapore Air that are battling excess capacity and declining premium traffic. Asian operators are also particularly vulnerable to rising fuel costs as their profit margins are about half those of their North American peers after competition pushed down fares.

In order to survive, some Asian airlines may be forced to ape U.S. low-cost carriers and charge for extras -- ranging from food and alcohol to checked-in baggage -- that have been taken for granted on long-haul flights for decades, according to Mathieu De Marchi, a Bangkok-based aviation consultant at Landrum & Brown.

“More full-service airlines in Asia Pacific might consider doing the same,” he said, declining to pick out the carriers in the region most likely to make customers pay.

Making money out of so-called ancillary services emerged among traditional U.S. carriers following the global financial crisis, when their losses ballooned. Delta Air Lines Inc. -- profitable every year since 2010 -- now employs the strategy to good effect, De Marchi said.

North American airlines are likely to generate an operating profit margin of 15 percent in 2016 versus about 8 percent for Asia-Pacific carriers, according to the International Air Transport Association.

Budget airlines including AirAsia Bhd. and Jetstar, which is owned by Qantas Airways Ltd., have long tried to squeeze extra cash from customers during flights. Michael O’Leary, chief executive officer of European low-cost airline Ryanair Holdings Plc, in 2009 suggested charging customers to use the toilet.

Fuel is typically an airline’s biggest expense and this year’s 30 percent price increase is enough to threaten the global aviation industry’s five-year run of earnings growth, according to Heathrow-based advisory Flight Ascend Consultancy.

Critical Review

“Cathay is going to have to’’ start charging customers for extra services, said Neil Hansford, chairman of Strategic Aviation Solutions, an advisory business north of Sydney.

Cathay, Asia’s biggest international airline, is conducting what it calls a “critical review” of its business after an 82 percent drop in net income for the first six months of the year. Last week, Cathay said 2017 will be “challenging.”

Cathay seeks to provide a “consistent premium experience” on every flight and had recently raised the check-in baggage allowance in all classes and cut excess baggage charges, the carrier said in an e-mail. Singapore Air currently has no plans to introduce extra charges, a spokesman for the airline said.

Oil prices started to tumble from more than $100 a barrel in mid-2014 to about $26 in January this year. Brent for February settlement climbed 13 percent last week after OPEC’s accord. Aviation fuel jumped 11 percent the same week.

To be sure, Cathay, Singapore Air, Qantas and other legacy carriers in Asia were still plying passengers with free drinks when crude oil cost $145 a barrel in 2008. Airlines worldwide are on course to generate profits of $39 billion in 2016 after the two-year oil-price slump, according to IATA.

Capping Expenses

Qantas, for example, has capped fuel expenses in the year ending June 2017 at no more than A$3.2 billion ($2.4 billion). That would be the Australian airline’s smallest fuel billin more than a decade after a turnaround program under Chief Executive Officer Alan Joyce.

“As a full-service airline, we don’t make a habit of introducing new charges,” Andrew McGinnes, a Qantas spokesman, said in an e-mail. “Through our transformation program, we’ve focused on removing cost by becoming more efficient.”

In an era of pricier fuel, full-service airlines may cut flights or reduce the frequency to tourist destinations such as Bali in Indonesia or Cambodia’s Siem Reap because of the absence of premium passengers, said Hansford at Strategic Aviation Solutions.

Aircraft such as Boeing Co.’s 787 Dreamliner and Airbus Group SE’s A350 may be more appealing to airlines because the twin-engine aircraft burn less fuel than four-engined models such as the Boeing 747 and the Airbus A380, he said.