Greater numbers of people are getting on planes, but that isn’t helping the airlines just yet. Air China reported an increase of 6% in travelers while writing off a 5.7% dip in operating profits on higher energy costs and a widespread recession in the travel industry.
Removing a Critical Revenue Component
This quarter was the first in which fuel surcharges were no longer applied to any ticket purchases, boosting demand. These surcharges, however, are very important to airlines’ bottom lines and represent extra income on any ticket purchased. Were these fees to stay in place, it is possible that the firm could have operated at a profit – but at the cost of alienating some of its travelers.
Losses on Hedges
Much of Air China’s losses are due to extensive bets the company made on rising energy prices. Since the cost of oil has plummeted, Air China sits on billions of dollars worth of unused oil contracts that keep operating prices higher even as oil falls. Transportation and delivery firms around the world sit on large hedging bets made when oil reached record highs in 2008; however, many will show large losses from oil prices.
A Global Problem
Around the world, airlines are expected to lose as much as $4.7 billion due to oil hedges and decreasing demand from business travelers. The report from International Air Transport Association outlined the $4.7 billion number in March, which was 10 times higher than the initial expectation. Domestic travel in China however is strong, with an increase of 18% from this quarter a year ago. Analysts contest that much of the gain results in minute increases in profits as the Chinese government regulates entirely the price for airline travelers making domestic flights.