Airlines buckle under fuel hikes

[Selfloader]

Two very interesting articles this week on the impact the fuel price
is having on local and international airlines. John Morrison and SAA boss air their views. One can only wonder how some local carriers are going to get through this now that oil is above $135!
Financial Mail - Turbulent skies (http://free.financialmail.co.za/08/0627/cover/coverstory.htm)
The Times - Mayday signals from world’s airlines (http://www.thetimes.co.za/Business/BusinessTimes/Article1.aspx?id=788229)

[countingteeth]

From the Financial Mail (fair use) :

"SA domestic passengers have so far been spared the worst of cost-related fare increases because of robust competition among low-cost airlines. Market share is shifting towards these airlines to the extent that at least two are considering leasing new aircraft to meet demand."I am more interested as to which of the 3 LCCs are NOT considering fleet renewal ;)

More from the Financial Mail (fair use):

"Adding to the pain is the weakening rand. Gidon Novick, CEO of British Airways' Comair and its budget subsidiary kulula, says: "The crude oil crisis speaks for itself, but the rand-dollar exchange rate is equally important. Losing 15% against the dollar has had a significant impact. It's very dramatic.""The negative part of leasing... As the Rand weakens, the lease payment increases. A new 738 costs about $400,000 to $425,000 per month to lease (depending on spec). At R6.5/$, the lease payment (@$400k/month) was R2.6mil/month. At R7.89/$ (todays rate), the lease payment jumps to R3.156mil. Thats an extra R6.672mil a year. Assuming a lease of 5 aircraft, and you get to R33.360mil a year extra onto the bottom line for exchange rate adjustments alone (projected accruals)! This basically means that the airlines will be forced to hedge currency if they renew their fleets so that projected expenditure can be properly budgeted for during the volatility the Rand is experiencing. Double whammy - managing currency hedges and fuel hedges...

The really cr@p part of this is that you cant even purchase in Rand and finance locally. The ever raising interest rates have effectively killed that option - ask Comair (who financed R100mil per plane (only on some of them mind you) on their "new" fleet). Each percentage point hike must be really hurting their cash flow! If you want new planes, you have to take your chances and hedge currency...

For those that actually care, here are the lease rates (per month) for the others (assuming they are brand new), with a per seat lease rate in LCC config :

738 (189 pax)
$425,000
$2248.68/seat/month

73G (149 pax)
$370,000
$2483.22/seat/month

A320 (180 pax)
$415,000
$2305.56/seat/month

A319 (156 pax)
$350,000
$2243.59/seat/month

[Flyer14]

Is it not feasible to purchase aircraft outright?

[countingteeth]

Hmmm. To express this another way, assuming you compared the costs of a MD80 in LCC (157 seats) to a A319 purely in terms of lease vs fuel, and assuming you fly 3000 hours per year :

At R8/$ and fuel at R10/L, and with the MD80 burning 950gal/hour, the A319 would need to burn 680gal/hour to break even (recoup its lease cost). Difficult.

If fuel goes to R11/L, The A319 needs to burn fuel at 710gal/hour to break even. Now it starts making sense to start looking at replacing.

If fuel goes to R15/L, the A319 is saving you R10mil a year in costs over a MD80, lease rate included. That saving would only be wiped out with the Rand at R10.60/$.

Obviously C-Check costs and Insurance (if you included them) work to the MD80's advantage, but they represent a minor portion of the costs, and I dont think they will effect the break even point too much...

I bet that Comair and 1Time are watching the Rand and Fuel very very closely. We have reached that delicate point where if the fuel price doesnt drop, they will have to go out and lease. Presuming of course they can get out their current leases... BUT they need to hedge currency to make sure that the lease payments dont erode savings should the Rand plummet again. I wouldnt want to be in their shoes :)

[countingteeth]

Is it not feasible to purchase aircraft outright?I dont think any carrier in SA has the cash on hand to do that...