Effect of Oil Prices on Airlines Industry

Harsh rise in fuel price led to higher ticket prices. Willie Walsh, chief executive of International Airlines Group said, “Ticket prices and fuel rates were being kept under review after oil breached $110 a barrel this week”. As a result, British Airways met tough competition from low cost airline that provide cheap discounted rates to passengers. This has caused BA’s passenger count to fall shockingly (The Guardian, 2011).

The airline industry has been a major factor in the globalization of the world economy. It connects the sellers and the buyers as well as transports goods across countries. It also breaks the time and distance barriers. In the past, air travel was considered a luxury but it is now a common necessity.

Rising fuel prices has a huge impact on the airline industry. In an article published by the New York Times in 2007, oil prices were hovering ‘near $100 a barrel’ which caused the International Air Transport Association (IATA) to ‘slash’ their predicted profits for 2008 from ‘$7.8 billion to $5 billion’ (Clark, 2007). In 2008 high fuel prices were ‘dominant factor’ in the losses that faced the industry, and continued to same effect in 2009 (Dunn, 2009). Diagram 2 shows how fuel price has increased and fallen over the last 5 years.

American airline industry is steadily growing at an extremely strong rate. This growth comes with a number economic and social advantage. This contributes a great deal to the international inventory. The US airline industry is a major economic aspect in both the outcome on other related industries like tourism and manufacturing of aircraft and its own terms of operation. The airline industry is receiving massive media attention unlike other industries through participating and making of government policies. As Hoffman and Bateson (2011) show the major competitors include Southwest Airlines, Delta Airline, and United Airline.

Fuel cost, airport user and air navigation fees, foreign exchange, Aeroplan, Star Alliance, key suppliers, regional carriers, economic and geopolitical conditions, competition.

Airlines aren’t the only companies that hedge their required fuel. But airlines’ sensitivity to fuel costs can be more obvious to consumers, who often feel it in the form of higher ticket prices and international fuel surcharges when oil prices rise.

The aviation industry of any nation acts as a contributor to its economic growth, helps in globalisation and creating an international image. It is the best in terms of the fastest, safest and convenient mode of travel. Even though it is an expensive one, it is expanding its markets across the middle-class who are ready to spent money on leisure trips. Thus it is truly stated that aviation forms a vital core infrastructure area without which a country economy is handicapped.

Somalia is a net fuel importer. Any variations in oil costs directly affect the nation. Fuel about tripled in cost amid one two-week period in late 2007 and early 2008, from USD 0.40 per liter to USD 1.10. Sometimes, the expense of transportation has quadrupled, leaving numerous individuals cut off. The fuel price in Somalia has

According to Liu (2012), the U.S has the biggest economy in the world and its 17% proportion of the global GDP is testament to that. The U.S economy is comprised of various sectors and one of the most vital sectors is the aviation industry, which falls under the transportation and logistics sector and is a major source of growth for the U.S economy in terms of revenue, capacity building and human development. This highlights the importance of the domestic aviation industry, and any factors that affect this industry are bound to have effects on the entire economy.

The growth of airline industry in any country is directly proportional to its GDP growth; the greater the business activity, the more air travel and the higher the GDP of the country. The demand

Despite Cathay Pacific is one of the foremost players in the airline industry in Asia-Pacific, there are still powerful competitors such as Singapore Airlines, Qatar, and Emirates Airlines. And the fee of fuel is its most significant ratio of the fixed expenses for these. According to data from the financial report of 2015, the fuel cost of Cathay and Dragonair was about HK$ 16,619 million, declined by 11.6%, in contradiction of the 2014’s. However, it was due to the dramatic slump from 2014 (Cathay Pacific Annual Report, 2015).

Usually the price is set by manufacturing company and this company sells the goods by maintaining certain profit margin including certain amount of tax and VAT to the respective airlines companies. The company uses cost plus pricing along with value plus pricing.

The Rise in the price of the raw material is sudden because now a days the petroleum prices changes randomly.

This would mean higher economic growth for the airline companies and with higher economic growth, it means expectations and thus the demand for airline tickets will also increase due to this fact and thus the supply will increase and if the demand’s increase is more than the supply’s increase, prices will go up as demand is more than supply.

India is the fastest growing aviation market and expected to be within 4-5 big aviation markets by 2020 and 3rd in terms of domestic market after US and China.