Travellers of the world, rejoice: the end of the airline fuel surcharge is nigh. Last week, Hong Kong’s Civil Aviation Department said that from February, airlines will no longer be permitted to levy the fee (currently $14 and $3 for long and short-haul flights, respectively) on flights originating from Hong Kong. The move comes as the oil price languishes at its lowest levels in over 12 years.
Passengers may cheer the small saving; the effect on the city’s airline, Cathay Pacific, will be more mixed. The good (if not exactly surprising) news is that demand for seats generally rises as ticket prices fall, according to Credit Suisse analysis. Less good is that removal of the charge eliminates a buffer against fuel cost mismanagement. While many peers, such as US and Chinese carriers, no longer hedge against rising oil prices, Cathay has protection in place out to 2019. This policy has occasionally proved costly. In 2008, its hedge book ended up facing the wrong way, wiping $1bn off profits. In the first half of last year, as the average oil price dropped by nearly $50 a barrel, hedges cost Cathay $600m of a hypothetical $900m in fuel savings.
The company has other challenges, too. Half of ticket sales are in non-US dollar based currencies. With Cathay reporting in greenback-pegged Hong Kong dollars, the strength of the US currency hurts its bottom line.