Fuel Prices at Record Low but Philippine Airfares Not Dropping
Filipinos that drove to visit family this past Christmas benefited from having extra cash in their pockets, but those that travelled by air were not as lucky. In spite of fuel dropping to record lows over the Christmas season, airlines in the Philippines have not reduced or eliminated any of their fuel surcharges.
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The price of jet fuel fell by approximately 32 percent over the same period in 2013. But in spite of the massive drop in jet fuel prices, airfares have actually increased. Fuel generally accounts for anywhere from a third to a half of an airline's operating expenses, but if the price of fuel has fallen, why haven't the airfares?
In short, it's because airlines in the Philippines that have been hungrily seeking profit after years of losses have no reason to charge less, especially after a year of airline consolidation that has resulted in less competition. With the marriages of AirAsia and Zest Air, as well as Cebu Pacific and Tigerair Philippines, the number of carriers in the Philippines competing against one another has literally been cut in half.
With less competition, meaning fewer choices for consumers, passengers are left with little hope of seeing reduced airfares. Despite the higher airfares, demand remains stronger than ever. That's not good news for travellers in search of a cheap flight as it provides air carriers with little incentive to reduce their prices and pass any savings onto customers.
Unfortunately, reducing fuel prices for airlines may not be as simple as most would expect. Airlines don't generally purchase fuel on a weekly or daily basis like the average vehicle owner. Airlines sign long-term fuel contracts as a means to lock in a specified price, hedging the possibility of a fuel increase in what can often be an unpredictable market. That means that the fuel being consumed today by the country's airlines was most likely purchased months ago when prices were much higher.
However, it also works both ways and the contracts signed in the present will provide airlines with cheaper fuel for the future, which is the point of the hedge. But does that suggest that we can expect a sharp decrease in fuel surcharges in the coming months? At this point, there is no guarantee, which is why it's worth raising the issue.
According to the International Air Transport Association, it is possible that the average airline ticket price may decline by five percent in 2015 if current fuel price trends are to continue. However, any reductions should not be expected until the summer at the earliest. Only time will tell if airlines will follow through.
In a market of strong demand, it remains unlikely that airlines will take any proactive steps to cut airfares. But that's not stopping Philippine lawmakers from pressing for lower ticket prices. Representative Arnel Ty has urged the Civil Aeronautics Board to eliminate the fuel surcharge from the price of airline tickets. Airlines have been permitted to collect this surcharge in the past as a means to recover losses due to rising fuel costs.
"To allow passengers to enjoy lower airfares, the Civil Aeronautics Board should eliminate the fuel surcharge mechanism," said Ty. "Better yet, it should be replaced with a fuel discount scheme that will compel airlines to automatically lower fares as oil prices go down." He added that there is no need for the fuel surcharge as world oil prices continue to decline.
The price of oil has dropped to $53 US per barrel, which is considerably lower than the $107 US per barrel that was being charged in June of 2014. "The multinational financial services firm Morgan Stanley projects that oil prices will fall further to as low as $43 per barrel by the third quarter of 2015," added Ty.
According to Ty, a member of the House Transportation Committee, the airline fuel surcharge varies by airline and route, but generally ranges from P300 for domestic flights up to P18,000 for international flights. The abolition of the fuel surcharge would particularly benefit overseas Filipinos, with more than 5,000 departing the country on a daily basis. The domestic market stands to benefit as well as it is forecast to reach 21 million passengers this year alone.
In short, it's because airlines in the Philippines that have been hungrily seeking profit after years of losses have no reason to charge less, especially after a year of airline consolidation that has resulted in less competition. With the marriages of AirAsia and Zest Air, as well as Cebu Pacific and Tigerair Philippines, the number of carriers in the Philippines competing against one another has literally been cut in half.
With less competition, meaning fewer choices for consumers, passengers are left with little hope of seeing reduced airfares. Despite the higher airfares, demand remains stronger than ever. That's not good news for travellers in search of a cheap flight as it provides air carriers with little incentive to reduce their prices and pass any savings onto customers.
Unfortunately, reducing fuel prices for airlines may not be as simple as most would expect. Airlines don't generally purchase fuel on a weekly or daily basis like the average vehicle owner. Airlines sign long-term fuel contracts as a means to lock in a specified price, hedging the possibility of a fuel increase in what can often be an unpredictable market. That means that the fuel being consumed today by the country's airlines was most likely purchased months ago when prices were much higher.
However, it also works both ways and the contracts signed in the present will provide airlines with cheaper fuel for the future, which is the point of the hedge. But does that suggest that we can expect a sharp decrease in fuel surcharges in the coming months? At this point, there is no guarantee, which is why it's worth raising the issue.
According to the International Air Transport Association, it is possible that the average airline ticket price may decline by five percent in 2015 if current fuel price trends are to continue. However, any reductions should not be expected until the summer at the earliest. Only time will tell if airlines will follow through.
In a market of strong demand, it remains unlikely that airlines will take any proactive steps to cut airfares. But that's not stopping Philippine lawmakers from pressing for lower ticket prices. Representative Arnel Ty has urged the Civil Aeronautics Board to eliminate the fuel surcharge from the price of airline tickets. Airlines have been permitted to collect this surcharge in the past as a means to recover losses due to rising fuel costs.
"To allow passengers to enjoy lower airfares, the Civil Aeronautics Board should eliminate the fuel surcharge mechanism," said Ty. "Better yet, it should be replaced with a fuel discount scheme that will compel airlines to automatically lower fares as oil prices go down." He added that there is no need for the fuel surcharge as world oil prices continue to decline.
The price of oil has dropped to $53 US per barrel, which is considerably lower than the $107 US per barrel that was being charged in June of 2014. "The multinational financial services firm Morgan Stanley projects that oil prices will fall further to as low as $43 per barrel by the third quarter of 2015," added Ty.
According to Ty, a member of the House Transportation Committee, the airline fuel surcharge varies by airline and route, but generally ranges from P300 for domestic flights up to P18,000 for international flights. The abolition of the fuel surcharge would particularly benefit overseas Filipinos, with more than 5,000 departing the country on a daily basis. The domestic market stands to benefit as well as it is forecast to reach 21 million passengers this year alone.
Although air carriers in the Philippines have yet to take any action to lower fuel surcharges, not all carriers in Asia are being so greedy. Japan Airlines recently announced that it will lower fuel surcharges on tickets purchased on or after February 1, 2015. For Filipinos travelling between the Philippines and Japan, or using Japan as a connection point between North America and the Philippines, the lower surcharges will amount to significant savings for travellers.
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| Image Source: AviationNews.eu |
Between Japan and the United States, the surcharge will drop from $259 to $173 per ticket. On other routes, the surcharge reduction could be as much as a fifty percent drop. Japan Airlines has stated that the lower surcharges will apply to flights operated by Japan Airlines and its code-share partners. That means that if you are booking your ticket on a code-share flight operated by Japan Airlines, ensure that you book your ticket through JAL, rather than the code-share partner, as the other carrier may not be extending the same fuel surcharge discount. Moreover, although local Philippine carriers may advertise deceptively cheap airfares, after the fuel surcharge is applied, they may in fact end up being more expensive than full service carriers like Japan Airlines.
Carmelo Arcilla, Executive Director of the Civil Aeronautics Board stated that the regulator has approved the removal of the fuel surcharge beginning the first week of January. However, he did not make it clear as to whether they would be requiring airlines to remove their fuel surcharge.
"We are just awaiting the board resolution to be signed," said Arcilla. He added that the regulator removed the fuel surcharge due to the significant drop in oil prices but that the removal was indefinite and depended on future jet fuel prices.
Jet fuel is traditionally an airline's second highest expense after labour. Data from the International Air Transport Association revealed that jet fuel prices were averaging $75 per barrel as of December 26, which represents a 42 percent drop in price from the previous year.
Cebu Pacific with all their add ons are not cheap, baggage weight limit is way too low. I am sure in the future this airline will charge you extra for using the toilet. They will not pass on any savings from fuel until the government forces them to
ReplyDeleteThe problem with CebPac is that they don't even bother to include the fuel surcharge in their fares. They give a range but not the exact value. But that's what you expect from an LCC.
DeleteYou need to give CebPac credits for allowing the masses to fly, I just wish they had better service. Honestly, I've only flown with them twice and I had no problems on either flights, but sadly not everyone had this kind of experience. If you keep getting flooded by customer complaints then that means that there's something that you need to do about it.
They should just do it like how they do it here in the states! Just show one fare and avoid anyone hating the airline for adding so much fees!!!
DeleteCebupac just recently removed fuel surcharge. Bought a ticket to Japan yesterday and saved myself 4000.00 PHP.
ReplyDeleteThat's how a growing LCC airline should be. It is all about your savings, baby! That is true with Spirit, JetBue, Southwest and Allegiant here in the USA. They hardly encounter financial revenue issues because their airplanes are almost always full! I've been flying any of them LAS/LAX every week and whoever has the lowest airfare that week will get my business. Aren't you glad you now have an LCC carrier (or two) in your country? Hopefully, more airlines will come out (established) and join the healthy business competition out there. Kudos to Cebu Pacific !
DeleteIts time the government moved in on Philippine Airlines and forces them to remove fuel surcharge from all routes
ReplyDelete