[SimonS1]

I thought the carrier charge was just a way of fleecing reward ticket users as it is generally paid on top of the likes of Avios?

I tend to look only at the bottom line price as a comparison when booking flights but I do fully agree airlines should be forced to include their own costs in the main price (ie price + taxes).

[PeterCoultas]

SimonS1: +1 on carrier charge & reward tickets but BA europe deals are still great with the inclusive charge (recently £ 12-50 ARN to LHR)

Other airlines give better value on long haul reward tickets especially if you do not start in the UK!

[openfly]

When we started discussing this a year or so ago, BA stated that, as they had forward bought their fuel for a year ahead, there would not be an immediate benefit. Within weeks they announced that they buy their fuel two years ahead! Maybe they were mistaken, after all, and they bought their fuel 5 years ahead, two years ago. So they can’t possibly adjust the fares. But oddly another department in BA announces massive profits ” due to the drop in fuel price”. My brain is befuddled!

[AnthonyDunn]

@ openfly – 14/01/2016 14:36 GMT

It must just be the cynic in me but surely the “we forward bought our aviation fuel/JetA1 x years ahead” (where x is however many years is necessary to push any price reductions from lower fuel prices to well over the horizon) is for we punters whereas “our bottom line has benefited from falls in our fuel costs…” is for the teenage scribblers in the City of London?

You and I need to remember our position in the pecking order at BA: as customers, we come well behind the shareholders (read City institutions).

[Ah,Mr.Bond]

Funny how peope bleat on about this as soon as the price of oil comes down. We are in an era of fairly cheap net fare levels excluding all taxes and charges, which will only go up to compensate if the YQ levels reduce. The system is designed so you will always be paying the same.

[SimonS1]

@AnthonyDunn – I don’t really follow you there. If you hedged and bought Avgas forward two years ago you wouldn’t be getting the price it is today.

I don’t have any figures with me but from what I recall if you had hedged oil 2 years out in Jan 2014 you would still be paying around $80 for it now under you contracts (compared to a spot price of $30).

Once the contracts run off then the airlines will benefit. I believe in the last investor day most of BA’s hedging will have unwound by mid year.

[Chutzpahflyer]

So now I feel well and truly pecked! OK, so advance purchase of fuel is understandable, but as is pointed out, what BA tells City-types tells a different story to what the fares say!
I’ve just booked an award flight: me and my lovely wife to JFK in Club, then back from LA in WT+, which cost nearly a thousand quid in carrier imposed charges. What’s the point!?!

[canucklad]

Yep, remember these days loyalty is very much one way.
It’s not that companies don’t value our repeated custom,of course they do….We are after all a cash cow that requires constant milking!

Having said that, TOH’s comments on another topic gives us all hope!

[AnthonyDunn]

@ SimonS1 – 14/01/2016 16:46 GMT

As I said, playing the cynic (as well as the sceptic)…

First the situation with the oil price. From the Economist 09Jan16 (p. 19), the average price of Brent crude has fallen from c. USD120/barrel in 2011 to c. USD95 in 2015 and down to sub-USD40/barrel this year. The price fall has been abrupt and taken place largely during 2014-15. Okay, so the linkage between Brent and aviation fuel/JetA1 is not 100%. However, IATA’s analysis:

http://www.iata.org/publications/economics/fuel-monitor/Pages/price-analysis.aspx

states that the global price of aviation jet fuel has fallen year-on-year (01Jan16 over 01Jan15) by circa 34% and in Europe, by nearly 39%. At a USD 66.7 per barrel average price (times 7.8 conversion factor to per metric ton)

http://www.cmegroup.com/tools-information/calc_refined.html

this equates to an average price for 2015 of USD520.26 per metric ton.

Let’s now look at IAG’s position over fuel prices. I’ve looked back through successive years of IAG Capital Markets Day presentations (for some reason, I’ve not got the Nov13 version to hand) and these act as a handy guide to management focus in the period leading up to that presentation.

CMD2011 (p.24) stated that fuel hedging drops to c.63% for 12months forward with an expectation (p.26) of a 12% increase in 2012. The hedging committee considered both forward forex and fuel prices – and considered the requisite hedging strategies. In the event, fuel costs did not rise and they started to fall back slowly. The focus in CMD2011 was on debt restructuring and lowering the costs of this.

In CMD2012, the main focus was the integration of BMI, cost reductions at LGW, the purchase of Vueling and restructuring IB. At p. 66, the comment is made that “new aircraft will deliver around £150m in fuel savings in 2015 vs. 2012 (assuming $110/barrel). A higher fuel price will would mean more savings”. Clearly, cheaper JetA1 has reduced this saving over older aircraft but it has lowered overall fuel costs fleet wide.

In CMD2014 the focus shifted onto other areas such as reducing the cost structure of LHR ground operations through a new staff contract and tackling the BA pension deficit. It was acknowledged that fuel was no longer posing upward cost pressures: “Current market rates for fuel and FX could have a potentially positive impact on our results” (p.4) and the 2015 targets were predicated upon “a fuel spot price of USD950/metric tonne and €:USD1.35”. (p.8)

The € has depreciated to USD1.08 (Jan16) against the greenback since 2014Q3 which will have had a negative impact if revenues are in €uros and fuel costs are in US$. Reference is made (p.85) to annual fuel savings to BA from more fuel efficient new aircraft of £150M in 2015, rising to over £350M in 2020. No mention of the impact of falling fuel prices (that I could see).

I have just rechecked CMD15 and at p. 4
“We are banking very little fuel benefit at this stage:
• Total fuel benefit >€2bn at current fuel and fx over next 3 years as hedges roll off
• We are focussed on retaining as much as possible
• We are currently banking only 15% to 20% of that in our targets”.

Whilst the CMD14 does not split out the benefits of forex hedging from fuel hedging, it is entirely clear (from their own presentation) that IAG intends to retain as much as possible of the benefit of the fuel price fall.

[SimonS1]

Yep the last bit about CMD15 is exactly what I understand. The hedges mean that BA has actually been paying over the top for fuel over the last few months. If they hedged a couple of years back they will still be paying around $80 per barrel (or maybe more) instead of spot prices of +/-$30.

As the hedges roll off their costs will fall dramatically as they will be able to buy (or re-hedge) at a much lower cost, hence the benefit of €2bn.

As for retaining it, surely they will if they can. The airline industry is mega competitive, however in any business you would surely not reduce your prices unless you had to. However if other airlines pass it on then they will be uncompetitive on price and risk losing business.

[AnthonyDunn]

Further evidence that Europe is awash with low priced aviation fuel/JetA1:

http://news.airwise.com/story/jet-fuel-imports-overwhelm-europe
http://news.airwise.com/story/airlines-enjoy-cheap-fuel-other-costs-a-focus

leads to an interesting confession/admission by WW:

“IAG CEO Willie Walsh said the group would continue to focus on costs in 2016 and staffing would probably be the biggest part of its cost base this year as fuel comes down.

“We compete with the likes of Ryanair, the most aggressive low-cost airline in Europe. We’ve got to have a cost base that enables us to compete in an effective manner,” he said, highlighting a decision to move some office jobs to Krakow, Poland.” Dated 18Jan16

[openfly]

@AnthonyDunn WW looking at moving jobs to Krakow. By coincidence, the airline that owns 10% of IAG, Qatar Airways, has it’s Euoropean headquarters in, yes, Krakow!

BA has a large part of its “customer service” in India.

I feel very sorry for the lovely folk in the Exec Club in Didsbury, Manchester, and Gold Card Customer Relations in Newcastle.
Cutbacks, cutbacks, cutbacks….the BA managers bonuses MUST be protected, at any cost.

We all know that WW will say, and do, nothing with regards to the rapidly falling price of fuel.

[SimonS1]

The only thing is that “Europe is awash with low cost Avgas” is not the same as ‘BA is paying low prices for its Avgas’.

[AnthonyDunn]

SimonS1

Indeed. And, on the basis that BA is paying more through its fuel hedging strategy than it would be from buying on the spot market, what does this say about BA’s hedging strategy…?!

That said, the situation is unlikely to last. As Sir Ian Wood said on the BBC Radio 4’s “Today” programme recently, each year some 10% of world oil production capacity becomes unproductive so it’s only a matter of a few years and supply will very soon equal demand – with obvious consequences for the oil price. So, with investment in oil exploration and new production having plummeted over the past 12-18 months, it is only a matter of time before a new (and higher price level) equilibrium is reached – even with the Saudis pumping like crazy and Iranian supply coming on tap.

[SimonS1]

BA would not be alone in that – most airlines who were hedging a year ago would be paying high prices. Plus of course the main purpose of hedging is to deliver certainty for budgeting and pricing rather than the lowest possible price.

In fact I’m struggling to think of any analyst who was projecting current prices – always easy to be wise after the event.

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