Friday March 28, 2008

SIA raises fuel surcharge by 15% on soaring jet fuel cost

business-times.asia1.com.sg :

As surcharges make flying more expensive, the sharp spike in the price of jet fuel is distorting the cost base of airlines worldwide. SIA spokesman Stephen Forshaw explained this after the airline raised its fuel surcharge again - the first increase this year [2008], after five last year [2007]. "Whereas four years ago, jet fuel made up about about a fifth of our cost base, today that's closer to two fifths," Mr Forshaw said.

The price of jet fuel is driven by several factors. First, the baseline price of crude oil has risen dramatically. Second, the difference between crude and the more refined jet kerosene - the so-called crack - has widened. A few years ago, it was just a few dollars a barrel of oil. Now the difference is between US$15 or US$20 a barrel. This is partly a result of growing demand for jet fuel, especially in Asia, and a lack of new refinery capacity in this part of the world.

SIA says the fuel surcharge covers only a part of the increase in the price of jet fuel, which has gone up almost 40% since the start of last year. The airline has hedged 50% of its volume requirements at an average of US$85-US$95 a barrel, against the current market price of almost US$120 a barrel. Mr Forshaw said, "The imposition of surcharges since 2004 has only collected about half the increased cost to the airline arising from this steep increase. The rest is absorbed into our cost base, and highlights the need for us to continue to drive our non-fuel costs down as much as we can to remain profitable and competitive."

- This article highlights an important point that I have been telling people about. Rising crude oil prices and the subsequent impact on petrol, diesel and jet fuel prices we all know about, but the increase in prices of these refined products have not kept pace with the increases in the crude oil price, thus squeezing the profit margins of the refineries. This is changing. The refiners are demanding and getting higher margins (aka the "crack spread" / "refinery spread"), and that means that there will be a surge in the prices of petrol, diesel, jet fuel and other refined products, increased costs to consumers, and subsequent ripple effects of price inflation throughout the economy.

See also :

1. Airlines tremble at prospect of $100 oil
2. Airlines cram more fliers into fewer seats, flights
3. $100 oil would threaten airlines: IATA economist
4. Soaring oil prices push up airline surcharges
5. Singapore Airlines profit slips

(2008-03-28 18:56:46 SGT) [Energy] Permalink

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