The Future of Air Travel
This is an extract from a speech I gave last month to the Whenuapai Airport Action Group, pointing out the increased costs that were about to hit the airline industry. John Key and Mayor Andrew Williams were in attendance. Since giving this speech, fuel prices have increased even further and Air New Zealand has announced two successive fare increases totalling 6% - Ed
...It just amazes me that proponents of more airports or runways for the Auckland region fail to consider the impact of rising oil prices on the future demand for air travel. Oil prices have quadrupled in US dollar terms or tripled in terms of the Euro in just four years.
Global oil supplies have not kept up with the demand indicated by these higher prices. According to industry reports, global conventional crude oil and condensate production has been more or less flat since 2005 at 74m barrels a day.
Non conventional fuel production such as bio-fuels are failing to keep up with the truly staggering 30 billion barrels a year consumed globally.
Aviation jet fuel is now at an all time high of over $US140 dollars a barrel. In September of last year it was $US85. So in a little over six months jet fuel has increased by 65%.
And it is important to realise that we haven’t seen the full impact of this price rise on ticket prices yet. This is because most airlines, and this includes Air New Zealand, have an option hedging programme in place. For Air New Zealand this effectively means that they currently aren’t paying more than $93 a barrel for 85% of their fuel consumption. But that is only for the current quarter. By October of this year, only 17% of their fuel consumption will be capped at about $110 a barrel – the rest will have to be purchased on the open market.
Last month Air New Zealand increased its fares by an average of 3%. At the time, CEO Rob Fyfe commented that fuel costs comprise 60% of the overall operating cost for long haul routes, and that further increases in the future could not be ruled out.
So what does this mean if we translate this into ticket prices for the coming year? Say, to choose a random example, you were wanting a return ticket to Hawaii. Right now the cheapest airfare that I could find was $1,500 return. If we assume that the current hedge ratio is factored into the cost of the ticket, then I estimate that when the ratio drops to 17% in October, we could see the same ticket costing over $1,800. And this is assuming that the fuel price doesn’t go above $149 barrel. If aviation fuel goes to $200 a barrel, then I estimate that a return ticket to Hawaii will cost well over $2,000.
For domestic travel, Air New Zealand claim that the cost of fuel comprises just 25% of the overall cost, but even so I really think that demand for air travel will not continue to grow at the same high rates that we have seen historically.
In fact, it is clear to me that air travel faces an imminent downturn, and any investor in airlines or airports is likely to suffer the consequences of that. But, from recent media statements, Waitakere City Council and Infratil seem woefully ignorant of this...