Air New Zealand has a fuel bill of about $1 billion. Photo / Mark Mitchell
Air New Zealand has a fuel bill of about $1 billion. Photo / Mark Mitchell
Airline chiefs are warning passengers to brace for higher prices as they are hit by fuel costs not seen for three years.
Industry body, the International Air Transport Association says airline profits are at their peak and next year will be "less positive".
The association will update its industry profitforecast tomorrow at its annual general meeting in Sydney, but speaking in the lead up to the event, director general Alexandre de Juniac, said the outlook had changed during the past six months as fuel rose to prices not seen for three years.
Tight control over supply by producers, strong demand from global economic growth and geopolitical tensions had pushed up prices, although there was a dip at the end of last week.
It was inevitable that costs would be passed on, de Juniac said.
Already airlines have responded by putting up fares around the world or warning of fuel surcharges being imposed, and in this county Jetstar and Air New Zealand have increased domestic fares by 5 per cent in the past fortnight.
Air New Zealand chief executive Christopher Luxon said airlines around the world were wrestling with how they offset the rising cost of fuel. Brent crude has topped US$77 ($110) a barrel in the past week after starting the year around US$60.
''The big problem with that is that every dollar adds $10 million of costs to Air New Zealand's bottom line.''
''All airlines, whether you're in Australia or around the world are working hard to see how they can take prices up and ultimately how much of that cost increase can you recover through pricing.''
Air New Zealand chief executive Christopher Luxon says airlines around the world are wrestling with how they offset the rising cost of fuel. Photo / Jason Oxenham
Air New Zealand flies a high proportion of very long distance routes where fuel was a higher component of overall costs.
''It becomes more challenging in some ways. In the high fuel environment New Zealand gets pushed closer to Antarctica - in a low fuel environment we get pushed closer to the rest of the world,'' said Luxon who is in Sydney and is on a keynote panel.
About 1000 executives from airlines, plane makers, engine manufacturers and other suppliers are at the event. IATA represents about 280 carriers worldwide, or 83 per cent of total air traffic.
Luxon said his airline had a fuel bill of about $1 billion and a proportion of its fuel hedged at fixed prices, which gave it time to adjust. Other airlines with older, less efficient aircraft or higher costs elsewhere in their business could be worse affected.
''The normal cycle in aviation is that fuel goes up, prices rise, demand may fall and capacity gets reduced,'' he said.
''That's the play in this part of the cycle, we know how this goes.''
Fuel can make up about a third of costs for airlines flying long haul. Photo / Grant Bradley
Although many airlines had modernised their fleets and were transforming their businesses Luxon still believed his company had a head start.
''I think we still have a bit of advantage - our average fleet age is 6.8 years, most airlines around the world that we compete with run anything from 10 to 14 years,'' he said.
''Some people would argue that over the period of low fuel prices had we gone too hard, too fast in getting to a newer more modern fleet - we think it fundamentally gives us a great platform to make the business as efficient as it can be.'''
Air New Zealand and its forerunners had been operating for 78 years and couldn't pack up assets and move somewhere else to make more money.
''Unlike other airlines we can't pick and mix and be here one day and gone the next - we have to find a way to make it work and keep New Zealand connected to the world and the world to us.''
Luxon said travellers had enjoyed some very low prices during the last few years and figures showed the price of air travel within this country had fallen in real terms for the last 12 years.
A Statistics NZ air fare index shows international air fares fell 20.9 per cent, and while domestic fares went up 16.8 per cent in the same period this is still well below the inflation rate. Statistics NZ said "CPI – all groups" index values, from June 2006 to March 2018, show overall inflation had risen 24.2 per cent.
Flight Centre NZ general manager product Sean Berenson said higher fares were unlikely to significantly affect the current boom in travel by Kiwis. However, the best way of avoiding higher prices were to lock in flights earlier. He said low air fares had encouraged travellers to think they would be able to get them up to the last minute.
