Airlines forced to increase their airfares

Jet fuel prices have risen faster than crude oil prices in the past three months. Photo / Thinkstock

Airlines are grappling with higher fuel prices which threaten recovery in the industry while travellers are being hit with higher fares.

Air New Zealand and Qantas last month increased fares on some routes after a rise last year of 9 per cent, according to Statistics NZ figures.

Jet fuel prices have risen faster than crude oil prices in the past three months and make up as much as 40 per cent of operating costs, depending on the route.

Marcus Curley, an aviation analyst at Goldman Sachs, said Air New Zealand was largely hedged for the next six months against crude prices but less so against jet fuel prices.

"The recent increase in crude is not so important but it's the refining margins that are much more significant."

Airlines had traditionally been slow in raising fares to recoup costs because they needed to protecttheir market share, said Curley.

"If you look at the dynamics of our market it is still competitive with too many carriers in it. It will be interesting to see if they will be able to better manage price increases."

New Zealand travellers were especially sensitive to ticket price increases which created challenges for airlines serving this market, he said.

The three-year delay in the Boeing 787 Dreamliner - originally scheduled to be delivered to Air New Zealand late last year - could turn out in the airline's favour because it would not have a sharp increase in capacity.

"Because of short-term hedging and medium-term lack of capacity coming through, they are better positioned than most to handle this but in saying that there is a one-sided risk."

In its six-month results released last month, Air New Zealand warned that fuel price volatility remained a "significant risk" to its full-year result.

Last week the International Air Transport Association downgraded its airline industry outlook for 2011 to US$8.6 billion ($11.6 billion) from the US$9.1 billion it estimated in December 2010. This is a 46 per cent fall in net profits compared with the US$16 billion the industry earned in 2010.

House of Travel retail director Brent Thomas said air fares started to increase in the final quarter of last year.

"We can see that continuing through this year as the fuel price remains high."

The transtasman market remained one of the most competitive in the world and this was likely to restrain fare increases between New Zealand and Australia, he said.

When fuel prices spiked sharply in 2008 several smaller airlines in the United States collapsed and larger carriers slashed capacity and jobs.

Yesterday, United Continental, the world's biggest airline company, scrapped plans to add flights this year and said it would drop unprofitable routes because of rising fuel prices.