The airline industry is operational on miniscule profits and even the slenderest change in its operational costs can affect its overall profitability. Th e highest share of its operating cost (ranging from 20 – 50%) is accounted by fuel cost. Thus, crude price volatility becomes a cause of huge concern for all the airlines.

The Analytics & Consulting team of Accelya have presented a report “Th e Crude Catastrophe – Impact of crude prices on an airline’s profitability”, which provides an insight into the impact of crude price volatility and the strategies adopted by diff erent airlines to gain a better position.

Th e strategy of an airline is guided by its geography, business model, costs and financial position. While airlines such as in the gulf can plan to build infrastructure given their strategic location between the eastern and the western part of the world; others as those in Europe have to consider ancillary businesses given the stiff competition both from regional and gulf airlines.

While a downward movement in crude price improves profitability and liquidity of the airline, which enables re-investment in the business; however, some risks can emanate from lower crude oil prices. Th is can have a direct implication on the stock prices of airlines.

Outlook for crude and jet fuel Th e report mentions that crude oil price is expected to remain benign at less than US$35 per barrel in 2016, which is about 63 percent and 30 percent lower than its level in 2014 and 2015 respectively.

Th is is essentially due to a wide gap between demand and supply emanating from a slow global economy on one hand, and greater supply on the other (increased production in the US; addition of Iran in the crude market post lifting of sanctions on it).

Going forward, this gap is expected to diminish marginally with crude inventory estimated to grow by 0.6 million barrels per day in 2017 compared to 1.6 million barrels per day in 2016.

Lower crude oil price translated into lower jet fuel price, though not necessarily by a proportionate amount. In 2016, jet fuel price is expected to be about 31 percent lower than in 2015. However, with higher demand next year owing to expected improvement in global economy, jet fuel price is expected to rise by about 16 percent in 2017.

The current price of jet fuel hovers between 103-112 cents per gallon (or US$43-46 per barrel). While the annual change remains range bound across regions, some volatility has been observed in the short-run driven by Asia and Oceania, and Middle East & Africa. Th e lower fuel price is expected to reduce the fuel bill by US$103.4 billion, as per IATA.

The current times of lower jet fuel prices have turned the airline business upside down with several airlines recording profits, and witnessing an improvement in their valuations and thus, stock prices. Th is is also the apt time when the airlines are investing heavily in assets and information technology along with revisiting their growth strategies.

This article will bring you the future outlook of crude, surcharges and the varied strategies adopted by airlines to gain a better position.