Fuel prices will have direct effect on airport retail

Gavin Lipsith

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The Pacific Asia Travel Association and Centre for Asia Pacific Aviation have warned that the effects of record oil prices will be passed directly to consumers and will influence travel-retail

As the barrel price of oil reaches record levels, it is not only airlines that will feel the squeeze, according to the Pacific Asia Travel Association (PATA). In a presentation at the recent Gate One2One conference, PATA Strategic Intelligence Centre associate director Oliver Martin warned that high fuel prices would lead to higher air fares and therefore affect the disposable income of passengers and their spend in airport retail outlets.

The statement came after a presentation by the Centre for Asia Pacific Aviation (CAPA) chairman Peter Harbison warning that if fuel prices continue to rise, “all bets are off” concerning the future of the Asia/Pacific aviation market. Those comments were proved wise earlier this week, when a tumultuous two days for American and European airlines hinted at the trouble ahead for their Asian counterparts, and forced the usually restrained analysts at CAPA to warn “there will be blood” in one of their daily bulletins.

Asked at the Gate One2One conference what the future would hold for Asian airlines if oil prices continue to rise, Harbison replied: “If fuel prices continue to rise, the low-cost carriers are in a good situation to continue growth, but because of their low fares they will still be vulnerable. Flag carriers would find oil prices even more difficult, and their model of operation would have to change dramatically. If the price of oil reaches $150 per barrel [compared to today’s $130.80] all bets are off.”

Martin said: “The airlines will have no choice but to pass on these costs in the form of fuel surcharges, which will mean that passengers have less disposable income when they travel. It will affect their choices from hotels to restaurants to shopping. While there will always be high-value travellers, there will be many who rein in their spending.”

The Chinese aviation market in particular will have to change drastically to avoid calamity, the experts warned. All of China’s leading airlines operate with big debt ratios, despite government-subsidised fuel, and if the subsidies end the carriers will find it impossible to carry on operating as they have done. The emergence of low-cost carriers in China, expected within the next few years, may alleviate the negative impact on traveller numbers but aviation restrictions must be lifted for this to take place.

A statement made last month by China Southern Airlines, which has a debt ratio of 82% and is one of the biggest carriers in the country, summed up fears for the Chinese aviation market: “The profitability of the industry will be subject to enormous pressures as a result of the sub-prime crisis in the US, the slowing down of the world economy, the contractionary credit policies of the People’s Bank of China, fierce competition in the aviation industry and the rise in fuel prices.”

Retail spend by low-cost carrier passengers in Asia is particularly vulnerable to higher fares as, unlike their European counterparts, Asian passengers on these airlines are known to have lower disposable income, said Harbison.