Gulf airlines poised to slash prices?

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The cost of travel in 2015 set to get cheaper, thanks to a sharp drop in fuel prices. Airlines in the Gulf Cooperation Council (GCC) countries are forecast to slash fuel surcharges on tickets by March or June this year, following the recent decline in oil and gas prices.

A number of airlines around the world, including Qantas, Virgin Australia, Emirates Airlines, Asia-Pacific and Japan Airlines have recently announced they are reducing their passenger fares in 2015. Virgin Atlantic has dropped the fares on some routes by more than 50 per cent, while Qantas has cut the ticket prices for Sydney to London by $416.

Gulf carriers

No price reduction has been implemented in the GCC yet, but one economist predicts that Gulf carriers are likely to implement fare adjustments in the next few months. “We can expect a reduction of fares by end of first quarter 2015, or by end of first half 2015, the latest” Alp Eke, senior economist at the National Bank of Abu Dhabi, observed.

“The global airline industry is very competitive,” Eke went on. “The companies have very low profit margins. Once a couple of airlines with reduced operational costs start decreasing their fares, the other companies will have to follow in order not to lose market share. I believe the fare reduction will first start with GCC-origin airlines. ”The price of oil has dropped by more than 50 per cent since June. The International Air Transport Association (IATA) has predicted that the falling cost of fuel could cause ticket prices to drop by 5.1 per cent this year.

Hedging

However, the practice of “hedging” could prevent some airlines from lowering the cost of fares. By hedging, carriers lock in a price for fuel to insulate them from future cost increases. Airlines are still consuming oil purchased a long time ago, they are therefore not currently benefitting from the price drop. Oil consumption constitutes nearly a third of a typical airline’s operating expenses. “Because of hedging, most airlines are paying too much, well above the market rate, for oil at the moment. Soon, hedging practices will cease and after the losses are covered, we can expect a reduction,” said Eke.

This article originally appeared in GULF NEWS

 

 

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