The Airfare-Headache: Unperturbed

Revisiting the issue: Airlines are pressed for creative display when their most expensive cost input and profit weapon, airfares, are inseparable from oil prices fluctuation.

Airline fuel being the most expensive input cost for airlines, seldom remains unaffected by fluctuation in global oil prices. A rapidly growing industry, adding more routes and fleet, and not one for pushing prices down, and ready to compete for market share, may have to be the most affected of the lot, with oil price-drama. The sad part of the equation is that airlines do not have the autonomy in freezing global oil prices. they are naturally in a dilemma when influenced by fuel costs, trying to pull in maximum profit from cheap fares and high occupancy. It is indeed a situation that no large businesses would like to experience, wherein their most potent weapon of airfare is left to be influenced by fuel costs.

Brent crude prices fell below $40 per barrel in December 2015, first time since the fall of 2009, from the highs of $114 per barrel in 2014. The period of 2009-2015 saw a lot of introduction in low cost airlines across economies, due entirely or on large part to falling oil prices and persistent demand. With low oil prices, airlines are left with more profits that is deployed strategically into expansion of flying routes, fleet addition, and in using low prices to gain market share. Following a spurt in expansive measures, these same new operations become painful to service when oil prices recover, leaving airlines with higher debt, lost market share, airfare instability, and consumer disloyalty.

The low oil price periods may be opportunities of short duration where airlines must build financial muscle and be more than creative to become immune from sporadic attacks of oil price fluctuations. In such a scene, Asia saw irreversible air traffic growth through last 25 years, burgeoning ahead at the rate of 6.4% a year, compared to America’s 2.7% a year; the Middle East at the same time reported a growth rate of 9%. Assuming the same trend continues, Asia Pacific air traffic growth is set to topple all other regions by 2034.

In all probability, airlines will never be left independent to decide airfares, unless they find a suitable and dependable airline fuel alternative. These periods of low oil prices being opportunistic, it is important that airlines strategize to operate also when there is a reversal in the trend. Unless that happens, there is every chance that the current high price animus continues, and we witness continuous price hikes and no motivation to fly. Well, it is indeed an ugly situation where all innovative strategies would seem inconsistent and distractive. Since these uninvited situations are inevitable in an industry which is not independent to price airfares, airlines must device a mechanism to deal with these short bursts of opportunities and the subsequent lack of them.

Airfares are a unique way of attracting new customers and retaining loyal ones, hence they must remain the most popular weapon of profit. Oil prices are meant to fluctuate and OPEC deals are meant to affect airlines’ input costs. Hence, with low control over fuel costs, airlines must achieve an unshakable balance between stable airfares and fleet expansion, with route expansion as the most threatening risk in terms of image, debt-pileup, and abrupt abandoning of new routes. Airfares must grow gradually independent and immune to fluctuating oil prices, when airlines are able to nail opportune times of cheaper fuel costs. Low airfares are and henceforth would remain the cash cow for airlines to facilitate perpetual stone-carved growth.

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