Fuel costs, weak peso squeeze PHL carriers

By Ashley Erika O. Jose, Reporter

HIGHER jet fuel prices and a weaker peso are putting pressure on Philippine airlines’ profitability despite relatively resilient passenger demand, according to the International Air Transport Association (IATA).

IATA Regional Vice-President for Asia-Pacific Sheldon Hee said local carriers face particularly high fuel costs, while the depreciation of the peso raises expenses denominated in US dollars.

“It has been a bit of a rollercoaster ride for all airlines and especially for the Philippines. The challenge with the Philippine carriers is that jet fuel prices here are actually higher than in other parts of the world,” Mr. Hee said in an interview with BusinessWorld.

He said the conflict in the Middle East has driven up jet fuel prices, adding to the financial pressures facing airlines during the second half of the year.

“But the effects of the Middle East crisis are continuing to weigh quite heavily on the industry. I think the outlook and the pressure on airlines specifically in the Philippines will be quite high in the second half of the year to the last quarter,” he said.

Despite these challenges, Mr. Hee said passenger traffic remains relatively resilient, particularly on international routes.

“Actually, international traffic remains positive. There has been growth in capacity into and out of the fields. There has been a bit of moderation domestically, but generally traffic and capacity still looks fairly resilient,” he said.

Data from the Civil Aeronautics Board (CAB) showed that total air passenger traffic rose 1.24% to 32.65 million in the first half from 32.25 million a year earlier, supported by growth in international travel.

International passenger traffic increased 2.69% to 15.27 million from 14.87 million in the comparable period last year.

Domestic passenger traffic was virtually unchanged at 17.38 million.

Mr. Hee said IATA continues to expect passenger traffic growth in the Asia-Pacific region, although airlines face uncertainties from fuel prices and broader economic conditions.

AIRLINE LOSSES
Higher fuel expenses have weighed on the financial performance of the country’s two listed airline operators, which reported losses in the second quarter despite revenue growth.

Cebu Air, Inc., the operator of Cebu Pacific, reported an attributable net loss of P5.49 billion in the April-to-June period, reversing an attributable net income of P8.51 billion a year earlier.

The budget carrier attributed its weaker financial performance to a sharp increase in fuel prices, with expenses outpacing revenue growth.

PAL Holdings, Inc., the parent company of Philippine Airlines (PAL), likewise recorded an attributable net loss of P6.12 billion in the second quarter, reversing a P3.33-billion attributable net income in the same period last year.

The company attributed the increase in flying operations expenses primarily to higher aviation fuel and oil costs, alongside increased depreciation and amortization.

PAL’s fuel expenses rose by P14.65 billion, or 56.3%, in the first half as average fuel prices increased 49.7% to $150.02 per barrel. Lower fuel consumption following capacity adjustments partly offset the increase.

According to IATA’s Jet Fuel Price Monitor, the global average jet fuel price increased 2.2% week on week to $196.70 per barrel as of Oct. 23, up 118.5% from a year earlier.

CURRENCY PRESSURES
Aside from fuel prices, Mr. Hee said the depreciation of the peso against the US dollar is adding to airlines’ operating costs because many expenses, including fuel and aircraft-related obligations, are denominated in foreign currency.

“I think cost is a major theme (in the outlook of the aviation sector). So, if you look at the major drivers of cost for an airline, fuel is one. Currency challenges are another. Because a lot of the costs of an airline are actually based in US dollars,” he said.

The peso breached the P64-per-dollar level on Oct. 27, closing at a record low of P64.17 against the greenback.

Higher operating expenses could lead to more expensive air travel, potentially weighing on passenger demand as travelers consider affordability when making travel plans, Mr. Hee said.

In the Philippines, airlines are allowed to collect fuel surcharges on top of base fares, subject to levels authorized by the CAB.

Fuel surcharges allow carriers to recover part of their fuel expenses, although airlines are not required to impose the maximum permitted amount.

Mr. Hee said travel demand remains present, but higher costs could affect the pace of growth as passengers become more sensitive to fares.

For 2027, IATA said the industry’s performance would depend partly on the direction of fuel prices and economic conditions, including developments in the Middle East.

“We really do not know what is going to happen in the Middle East, assuming that there is some stability then actually the fundamentals of the economic drivers are actually positive, I think that demand remains quite robust,” Mr. Hee said.