Higher jet fuel prices to hit smaller airlines

SMALL AIRLINE companies which thrive on fare discounts to lure passengers are set to see their profits hit by big increases in the cost of jet fuel.

Jet fuel prices have soared in the past six months from $120 a tonne (pounds 74.07) on 1 March to $189 (pounds 116.67) a tonne on 5 August.

Many airlines hedge part of their fuel budget to minimise the degree to which fluctuations in prices impact their profits. But this is an expensive strategy and one that can only delay the problem for a limited period.

British Airways has already hedged 55 per cent of its fuel costs as far ahead as March 2000.

A spokesman for BA said this level of forward hedging was "a deviation from the norm" and that the policy was intended to prevent the airline from having to pass the cost of higher fuel prices onto its passengers.

Analysts say that if airlines do not choose to pass on the higher prices to consumers, some carriers will struggle. They claim that airlines which use fare discounts as their main strategy for winning customers will find it hardest to compete as their break-even costs rise.

One analyst said: "The weaker carriers, when they see that fuel prices are rising and that their planes are flying empty, would rather cut back capacity. This capacity would then be picked up by the stronger carriers."

The higher passenger load factors for stronger carriers would further mitigate their higher fuel costs.