Explained: How Hong Kong airfares and world oil prices are linked

Big falls in oil prices globally should be reflected in the price of airfares ... right?

PUBLISHED : Thursday, 14 January, 2016, 3:40pm
UPDATED : Thursday, 14 January, 2016, 5:38pm

The plunge in oil is likely to pull down air fares as airlines stand to gain the most but not to the extent that the 12-year-low prices would suggest.

“There will be room for ticket prices to drop as fuel surcharges go down with fuel costs, and there will be downward pressure on air fare if oil continues to fall. But the marginal impact decreases as fuel is no longer as big a cost component for airlines as it was before because its price has fallen so much,” said Geoffrey Cheng, head of transportation research at Bocom International.

A 70 per cent drop in oil prices since their high in 2014 has helped global airlines post record profits in 2015. Fuel used to account for up to 40 per cent of airlines’ costs, a percentage that has now dropped to just around 28 per cent, Cheng said.

Fuel surcharges on outbound flights from Hong Kong in January have been lowered to just HK$24 for short-haul flights and HK$109 for long-haul flights, according to the Civil Aviation Department’s website. The monthly adjusted figures, proposed by airlines led by Cathay Pacific and approved by the government, stood at HK$129 for short hauls and HK$566 for long hauls last January, by comparison. “But air fares are no simple reflection of airlines’ costs,” Cheng stressed. Mainland authorities in February scrapped fuel surcharge for all domestic flights, a policy expected to stay “for the near future given the current oil price trend”, said Citi analysts in a report this week.

READ MORE: Why oil price may fall more but unlikely to stay low for long

But Chinese airline stocks have not gained as much from the oil plunge as one would have expected. China-listed shares of Air China, China Southern Airlines and China Eastern all slid on Thursday while their Hong Kong counterparts tumbled more, with Air China down the most, by 3.44 per cent, compared with Cathay Pacific’s rise of 1.72 per cent.

“Yuan volatility and depreciation pressure is to blame,” Cheng said, as the yuan continued its drop for the sixth day amid an ongoing currency battle between the People’s Bank of China and speculators. Chinese airlines, with large US dollar-denominated debts for their aircraft purchases, are vulnerable to movements of the Chinese currency.

Still, airline stocks have overall stood out as the bright spot in China’s market turmoil, with Spring Airlines leading the pack, rising 7.5 per cent in the past five days, followed by China Southern, 4.9 per cent, while the Shanghai Composite Index fell 5.23 per cent.