This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
The fuel prices are determined by the crude oil prices. In order to produce fuel and other petroleum products, the main raw material used is crude oil. (Chevron Corp, N/A) The prices of crude oil are determined by the market force of demand and supply. If there are grows in demand or disruptions in supply of crude oil, then the market will adjust by increasing the price of crude oil, subjected to the changes in demand or supply. One of the most recognisable causes of fluctuation in fuel prices is disruptions in the supply of crude oil in the market. Political instability is one of the factors. Majority of oil producer countries are in the emerging regions, where disruptions in supply of crude oil always happened and affecting the price. (Chevron Corp, N/A) Besides, shortages of supply can be resulted from a sudden refinery outage or maintenance and pipeline problems. On the other hand, the rise in the price of crude oil is caused by the increase in international energy demand driven by strong long term economic growth especially in non-OECD countries. According to the U.S. Energy Information Administration, make a projection that in between 2006 to 2030, there will be a dramatic increase of 44% in the total world consumption of energy. (Caltex, N/A) Adding together political instability, disruptions in the supply and growing demand for crude oil cause the price of fuel to be volatile. (237w)
To manage airlines companies, the management will try to minimise any cost associates with the company. According to Air Transport Association, 25.4% of airlines operating expenses were contributed by fuel. As the fuel price becoming increasingly volatile, airlines industries will face risk in rising fuel price and one of the ways to get rid of the risk is by hedging the fuel price. Hedging is a risk management tool that allows airlines to lock in a price for fuel and protect them from the risk of soaring fuel price in future. Neeraj Kapoor, Go Air spokesperson commented that aviation fuel pricing in certain region like India does not favour hedging, but recent hike in fuel price make them reconsider on hedging their fuel. (Kabtta, K, 2008) On the other hand, South West Airlines, which hedged about 70% of its fuel, got to consume it at a lower price of $51 a barrel, compared to the market price of $135 per barrel. (Kabtta, J, 2008) Besides hedging, airlines usually will increase the price of its fuel surcharge. Fuel levy or fuel surcharge is the additional cost to the fare, imposed on per ticket basis in order to retrieve the rising price of the fuel. (Koch, R, 2010) As for example, Virgin Blue had decided to follow Qantas action of increasing fuel surcharges due to the spike in global fuel prices. (Oâ€™ Sullivan, M, 2011) In short, an airlines company could avoid the surge of global fuel prices by either hedge the fuel price with any hedging instrument such as options or increase the fuel surcharge on the passenger. (268 w)
Now let us examined what are the possible impact that fuel price volatility may bring to the airlines industry and suggestion for the airlines company in dealing with this crisis. As we had discussed above, a surge in fuel prices will directly hit the airlines industry as the rising in cost of fuel will result in increase on the cost of operation. Besides, fuel prices are determined to have a relationship with economic recessions. Soaring fuel prices will trigger higher inflation which later be cooled off by monetary policy. As a result, demand for air travel will decline. Despite facing such challenge, there are airlines that determined enough to go against the tide by trying to reduce costs as well as implementing new strategies to be more competitive. Most of the airlines resorted in drastic action by firing some of their employee in order to cut cost since labour cost contributed almost 24.7% out of total operational cost. (Air Transport Association, N/A) As for example, due to sudden hike in fuel prices, Qantas determined to cut down the number of its employees. (Hannan, E, 2011) While other airlines company trying their best in finding new strategies in order to stay competitive with other airlines. For example United Airlines strategy is to use software developed for flight planning to choose the best route and speed of flight. (Wilen, J.2008) Another good example is Cathay Pacific where they decided to opt towards more fuel efficient aircraft such as Boeing 747-8F and Boeing 777-300ER other than issuing fuel surcharge on tickets to cover for soaring fuel prices. (Cathay Pacific Airways Limited 2010)In brief, increase in fuel prices may impact the airlines industry directly or indirectly and there are several ways to face this issue.(291)
In summary, airline industry has been badly affected by the rising fuel prices. The industry is losing both customers and revenues. Some airlines are trying to go against the tide by reforming themselves, but to a limited success. These airlines are working hard to reduce cost and implement new strategies to win back customers. While the world is still in recession, those efforts have started to show some good results. As such, it is possible to see airlines will bounce back and recover from bad financial conditions sooner.(88)