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Low oil prices could save airlines US$12bn

Photo by Mike Dotta
Photo by Mike Dotta

The world’s airlines could save US$12 billion this year, if oil prices remain low.

According to IATA’s latest Financial Monitor report, crude oil prices dropped to a 12-year low in January 2016, due to weaker global demand and concerns over excess supply, including the additional supply expected from Iran.

“If sustained,” IATA stated, “the most recent declines in oil prices would reduce the industry’s annual fuel bill by approximately US$12bn in 2016.”

It added however, that airlines’ fuel hedging contracts, whereby their fuel supply is fixed at earlier higher prices, could delay the benefits of the drop in oil prices.

Customers are already starting to see the benefits of these cost savings, according to IATA. Average global airfares dropped 12% year-on-year in the first 11 months of 2015, when reported in US dollar terms. This has also been helped however, by the appreciation of the US dollar against other currencies. Adjusting for the currency impact, fares were 5% lower.

“Recent falls in oil prices and competitive pressures within the industry are likely to translate into further declines in fares during 2016 as fuel hedges unwind,” IATA added.

And low oil prices are also helping to increase seat capacity. Aircraft that had been in storage, as they had been uneconomical to run, are now being reintroduced to airlines’ fleets. This could have a negative impact on the environment however, as airlines are now able to operate less-efficient, fuel-hungry aircraft, without such a significant cost impact.

Global seat capacity increased 5.1% in 2015, but IATA noted that the average passenger load factor “dropped back sharply” in December 2015, and airlines’ break-even load factor has declined in line with the fall in unit costs.

Global air passenger traffic grew by 6.5% in 2015 – its fastest pace since 2010. This rising demand was partially driven by the fall in global airfares, and IATA said it expects “another strong year in 2016”.