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Dikatso Mametse

THE price of air travel is expected to increasingly rocket as a result of the surge in the oil price, which is currently at $122.91 a barrel.

South African Airways (SAA) has already increased its fuel charges as of last month by $30 (R223) for domestic routes, $45 (R335) for regional travel and $110 (R820,60) for all international travel excluding Hong Kong and Sao Paulo, which go up by $66,40 (R495,34) and $28 (R208,88) respectively.

SAA chief executive Khaya Ngqula said that jet fuel accounted for about 30% of the airline’s total operating costs, indicating the huge effect the surge in oil price has on the airline.

The steep rise in the oil price added about R950 million in unbudgeted costs to SAA’s fuel bill in the 2007/08 financial year. Despite this, SAA is on the path to breaking even for 2007/08, excluding once-off restructuring costs, and is still on target to be profitable by March 2009, Ngqula said at a media briefing this week.

The airline had projected a R1.2- billion profit and 7.5% profit margin by March, when the restructuring plan is due to be complete. Ngqula indicated that the airline may need to be recapitalised again.

In 2007 the government recapitalised the airline with R1.7 billion, a windfall Public Enterprise Minister Alec Erwin said would be the last bail-out for the airline.

Kaushik Patel, SAA chief financial officer, said the most recent recapitalisation was just enough to cover the restructuring costs and that more money was needed to get the company to be more profitable, because of the rising costs.

Patel said the need for recapitalisation was dependent on the company’s debt:equity ratio (a measure of a company’s ability to borrow and repay money), which for most healthy companies was between 65% and 35%, he said. SAA is sitting on ratio of 90%, indicating the company’s financial weakness.

“The shareholders have to invest in the future. They have to put in money if they want to get better returns,” he said.

Patel said the airline had three different approaches to limit the effect of the increasing oil price on the company’s bottom line.

First there was the fuel levy based on oil price movements.

Then there was fuel hedging, which is done by locking in fuel prices with financial institutions at a fixed price. The airline had under-hedged so far; for instance it budgeted for oil at $84 a barrel whereas oil was now at more than $120 a barrel.

The airline also currency-hedges, locking in exchange rates with financial institutions at a fixed price.

Airlines at home and abroad are feeling the pinch.

Recently Nationwide Airline had to close down because of difficult market conditions.

Erik Venter, joint chief executive of Comair, which operates Kulula.com and British Airways locally, said air fares were likely to increase 30% across the entire industry this year because of the oil-price surge.

He said Comair’s fuel costs used to account for 15% of the company’s operating costs, but now accounted for 45% of total costs.

“We will only see the impact at a later stage. We might see business travellers downgrading to lower- cost classes, for instance,” he said.

London-listed British Airways, which posted preliminary results on Friday, said it would raise ticket prices and slash flights to protect its profit against soaring fuel costs, according to the Guardian newspaper.

The airline plans to suspend some services in winter to reduce costs. Analysts quoted in the newspaper said the airline would cover the rising fuel price by concentrating on making money from passengers who had to travel, while squeezing out discretionary travellers. Low-cost carriers, on the other hand, are gearing up to sacrifice price in order to conserve volume growth.

Locally, low-cost airline 1time’s chief executive, Glen Orsmond, said they were no longer shedding old aircraft in exchange for newer, more fuel-efficient ones. Their strategy was to use bigger aircraft to have lower fuel costs per seat, but they also had to increase ticket prices by about R100 across the board.

“Although fuel accounts for 40% of operating costs, we haven’t been hit hard by the oil price increase. The market is growing at a rate of 15% a year. We are growing at 30% a year,” Orsmond said.

SAA said it was looking for three Boeing 747 wide-body aircraft and three Boeing 747 narrow-body jets with lower running costs per seat.

This would bring to 55 the number of aircraft on the airline’s fleet.

SAA’s restructuring plan, which started in March last year, had reduced costs by almost R1 billion.

The two biggest restructuring initiatives completed successfully were the grounding of six Boeing 747s and consultations with labour on standardising and simplifying conditions of employment, with final agreements being put in place.

R638 million was saved by renegotiating conditions of employment and labour agreements.

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