Saturday, January 3, 2009

Jetset: Turbulent Times

Falling demand means delays in new flights

For air travelers, the impact of the global economic downturn has been mixed. The plunging price of oil – after hitting almost USD 150 per barrel last summer – has forced even cash-strapped airlines to take a second look at fuel surcharges. Many carriers, including China’s “Big Three,” are finally reducing this absurd levy.

Air China, China Eastern and China Southern, as well as Hainan Air, have all lowered fuel surcharges on major international routes, cutting the original amount of RMB 1,100 by about 15 percent on flights to Europe, North America and Australia. They have also halved it to RMB 550 on flights to the Middle East (home of most of the word’s oil reserves).

Of course, airlines have always factored oil prices in their airfares; it’s not like they had been flying without jet fuel before the latest oil price surge. It is clearly ridiculous to charge consumers twice for the same thing, especially when base fares (ticket prices before taxes and fees) are also going up.

Falling oil prices, however, are “too little, too late” to save the world’s airlines from another bleak year. IATA, the global airline trade group, expected the struggling sector to lose a combined USD 5.2 billion for 2008, with both passenger and cargo volumes shrinking for the first time in five years.

What can airlines do? They could raise fares, but that would only depress already-low demand. They could go further with their nickel-and-dime approach – except there is little left for them to charge after they take away free pillows, blankets, headsets, meals, drinks, checked-in luggage and preferred seats. (Speaking of preferred seats, it was really a sign of times when Singapore Airlines, long hailed the standard-bearer of premium services in all cabins, recently decided to charge economy-class customers USD 50 per flight segment for choosing to sit in an exit-row seat, which offers more legroom.)

The only option left is to cut capacity. A China Eastern official told local media that the carrier had parked more than 20 planes since last April. He also exposed the cost of unprofitable routes in the current economic environment, with the airline losing RMB 2 million every time it flies from Shanghai to New York.

That may explain many US carriers’ change of heart on China routes. It was not long ago when they fought hard for a coveted government-allocated slot to fly here, and winners deployed their biggest jets for the flights. Amid gloomy economic news, however, several US airlines have delayed the launch of their new China flights, e.g. United’s San Francisco-Guangzhou (postponed to spring 2009), and American’s Chicago-Beijing and US Airways’ Philadelphia-Beijing (both to spring 2010).

Some US carriers have also reduced frequencies for existing flights during the winter, e.g. Delta cutting Atlanta-Shanghai from daily to five times per week. Anticipating slow travel demand during the Chinese New Year holiday, United is even suspending Washington-Beijing (already cut from daily to four times per week) for the entire month of February – an inauspicious sign for the Year of the Ox. Steven Jiang

This article was originally published on page 112 of the January 2009 issue of The Beijinger magazine.

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