By Dennise Williams, Staff ReporterAIR JAMAICA, the national carrier, has found itself in a combustible situation. The airline must find a way to manage its jet fuel bill. Petroleum costs are rising, reaching a 21-year high of US$41.85 per barrel, and fierce competition forces the company to tread carefully in terms of increasing its ticket prices.
On May 13, the airline made public its fears of a J$1 billion fuel bill by year-end. Chief executive officer Christopher Zacca stated, "If the current prices remain until year-end, the airline will have to pay an additional US$18 million (J$1.1 billion) for fuel."
Already the carrier is being squeezed. Mr. Zacca stated, "For the first three months of this year, Air Jamaica's fuel bill jumped more than US$4.2 million or J$260 million."
To combat the rising prices, Air Jamaica has implemented some conservation techniques, but the company said that "they are not enough and Air Jamaica has been absorbing the massive fuel prices."
OPTIONS LIMITED
"Unlike your neighbourhood supermarket, the national carrier has to be very cautious about passing on increasing costs, said Zacca. "The national airline is operating in an environment where competitive prices are critical therefore the options are very limited."
Having options is of major importance in such circumstances. At the Armbrust International Jet Fuel Conference and Symposium held in 2002, months after the September 11 terrorist attacks, the seminar presenters revealed, "Fuel managers must understand how the key issues and constraints of the industry will impact on their responsibilities, as well as how to plan for and address potential problems associated with the changing landscape."
According to Armbrust International, a few of the problems are as follows: 1. Fuel suppliers will attempt to increase prices to cover volume losses.
2. Fuel suppliers will tighten credit terms of financially troubled carriers.
3. Increased fuel handling costs.
4. Increased flight turn times lead to poor asset utilisation.
5. Cost of additional fuel security measures.
THE ANSWERS
So then, what are the answers to these myriad problems?
The presenters at Armbrust give these possibilities:
1. Airlines should transition to fuel-efficient aircrafts.
2. A consolidation of airlines can improve pricing and terms. This consolidation was seen when Air France merged with KLM Airlines, creating the largest airline in Europe in terms of revenue.
3. Increased use of strategic sourcing and alliances with other airlines.
Another possibility open to Air Jamaica would be to lock into a price contract, termed hedging, with fuel suppliers.
This was the strategy used by Southwest Airlines Company. In a May 7 published report, it was revealed that the Dallas-based airline hedged more than 80 per cent of its fuel needs for the next two years at a price of US$24 a barrel. And Southwest is the only United States carrier to have hedged most of its fuel. According to the report, "Hedging fuel prices involves buying futures contracts or other instruments to offset a possible rise in oil prices. Extensive hedging programs keep airlines' fuel costs stable and predictable, while small hedge programs at least ensure that fuel prices won't cause an airline to go under."
