Fuel costs remain big concern for transport company chiefs

The price of oil may have more than halved in the past year but fuel costs remain one of the biggest concerns for the bosses of transport companies.

Out of 103 sector chief executives surveyed by PwC, three-quarters raised concerns about price swings for a major input cost, said Coolin Desai, head of transportation and logistics at the professional services firm.

"What is really hard for these companies is managing fuel cost volatility," Mr Desai said. "They have to determine how long forward in the future they hedge this risk - to be able to plan and price competitively."

The price of oil dropped from $115 a barrel in June to almost $45 a barrel in January and is now hovering around $55 a barrel.

For airlines, fuel accounts for about a third of costs, and volatility has increased uncertainty over the outlook for revenues.

Although the decline may tempt some airlines to add extra seats and pass on the reduction to customers through lower fares, there are questions about this strategy if prices were to shoot back up.

"No one predicted the decrease in the oil price and I don't think anyone's going to get the timing right on the way up. I don't think any investment bank or oil specialist can tell you," said Carolyn McCall, chief executive of easyJet, Europe's second biggest low-cost airline by revenues.

Jozsef Varadi, chief executive of Wizz, the Budapest-based budget airline, said that it had benefited from the fall in oil price because it had hedged only at about 50 per cent. Airlines hedge as a way of managing price volatility.

Mr Varadi said that the lower price of fuel had "thrown a lifeline to some airlines who probably should have gone out of business".

"They may throw capacity back into the market and that will erode the yield environment," he said.

But the drop in the oil price has unexpectedly benefited those who could not afford to hedge. Airlines that have benefited include the holidays-focused airline Monarch; City Jet, the regional airline owned by Air France-KLM; and Air Berlin, the German airline which has been restructuring.

Although the low cost of fuel might offer a short-term respite to struggling airlines, it might ultimately not prove a help, said Jonathan Wober, aviation analyst at the Capa Centre for Aviation.

"If they were previously struggling to survive and facing an existential threat, they would have been forced into confronting that by restructuring their cost base," he said, explaining that the boost received from making savings on fuel would delay some from addressing structural issues.

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