Drop in fuel prices benefits airlines, not passengers

Oil prices have hit a five-year low of US$67.50 a barrel. This should have been a godsend for the global tourism industry because the cost of air travel should have declined. But that has not happened.

Countries, such as several of those in the Caribbean, that have a heavy reliance on tourism, will be disappointed that their tourist arrivals will not increase because air fares have not decreased.

American Airlines, the world's largest carrier, is reported to have spent US$8.4 billion on fuel for jets in its primary fleet during the first nine months of 2014. That sum was the airline's single largest expense and accounted for about one-third of its operating costs. Those costs would have been reduced substantially by the dramatic fall in fuel prices following the decision on 27 November by the Organisation of Petroleum Exporting Countries (OPEC) not to cut production. The price of oil has now fallen around 40 per cent nearing US$118 a barrel at mid-year.

Oil prices were already falling before the OPEC meeting, but for strategic reasons Saudi Arabia and other Gulf States decided not to reduce their production. Had OPEC decided to cut production, oil prices would have risen – something countries such Venezuela and Russia hoped would have happened since their economies need oil prices in excess of US$100 a barrel to meet obligations.

However, airlines have opted not to pass on the benefits of the windfall in oil prices to customers. Instead, many that have been facing operational losses are anxious to turn to profitability, and so avoid bankruptcy that has troubled some. Airline experts say there are three major drivers of the industry economics: aircraft maintenance, ownership cost and fuel cost. The first two are fairly predictable costs over which management has some control, but fuel is a variable cost. When the price of oil was high and rising, many airlines were either losing money or barely surviving. Now, with lower fuel costs, all the airlines can make money by not passing on the savings to customers. Their shareholders will be happy since they will either earn greater dividends from their investment or get relief from the debt burden the airlines have been carrying. In Britain, for instance, the value of airline shares, including EasyJet and British Airways' owner, International Airlines Group, has soared in recent days.

In the case of the Caribbean, several tourism authorities have been subsidising the costs of flights into their countries by major North American and European airlines. The subsidy is a condition set by the airlines, and tourism authorities have had to pay it in order to maintain their tourism industries. In the past, the high price of fuel might have justified the subsidy requested by the airlines. The argument was that if countries wanted more flights than the airlines felt were profitable, the tourism authorities should share the risk associated with the investment in such flights. Now that the amount of the investment is reduced, it would be reasonable to assume that the amount of the subsidy would also be reduced. But, the airlines are unlikely to offer it and tourism authorities will have to negotiate hard to get the subsidy reduced or eliminated. Nonetheless, it is a negotiation worth pursuing because, since the tourism authorities paid in risky times they are entitled to some reward in safer conditions.

Reduced costs for fuel should also aid the small Caribbean airline, LIAT, which is the workhorse of many countries in the Eastern and Southern Caribbean. High fuel costs had contributed to plunging LIAT into losses for a number of years. The airline is carrying a substantial debt to the Caribbean Development Bank. The debt is underwritten principally by the governments of Antigua and Barbuda, Barbados and St Vincent and the Grenadines, all of which would be relieved to see LIAT return a profit that is sufficient to service the debt and invest in improving its operations.

My colleague, the veteran commentator Hubert Williams, has noted that both LIAT and Caribbean Airlines – the latter wholly-owned by the Trinidad and Tobago government – continue to charge fares for travel between countries in the Sothern Caribbean that are higher than journeys to New York and Boston.

It would be a welcome break for LIAT's passengers if the airline could also reduce it fares, but that will probably not happen. As with other airlines around the world, LIAT's shareholders and management are more likely to use savings from reduced fuel costs to reduce debt and stabilize the company. Given the very important role the airline plays in transporting both Caribbean travellers and tourists, passengers will grudgingly forego a drop in fares if the airline is seen to use the reduction in its fuel costs to make itself viable. Let us hope that happens.

Having nothing to do with fuel prices for airlines, the British government has given some relief to tourists into Britain and British tourists from Britain to other countries such as those in the Caribbean. In its Autumn Budget, the government announced that from May 2015, an unpopular tax on air travellers to and from Britain – the Air Passenger Duty (APD) – will be abolished for children under 12 years of age, and from May 2016 the tax will be abolished for those under the age of 16. This abolition will ease the cost to families with young children, and it will help tourism into Britain as much as it will benefit tourism into the Caribbean. But, while the partial abolition of the APD is an improvement in the present situation, the travel industry in Britain is demanding its complete removal in the interest of the British economy. For instance, Cathal O'Connell, chief executive of the airline BMI, has reportedly said that the tax is "holding back economic development, preventing investment and discouraging visitors to Britain". The same argument applies to the Caribbean. Perhaps more so because tourism represents a very significant part of their economies.

Therefore, despite the big drop in the cost of fuel, air travel costs still remain high. The airlines that are calling for the abolition of the APD in the interest of more tourism might themselves consider how they too could help the industry by investing a portion of their savings on fuel into less costly fares.

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(Sir Ronald Sanders is a Senior Fellow at London University)