East African airlines expect trouble over fuel prices

KAMPALA, Uganda (eTN) – Smaller airlines operating in the region and using outdated fuel guzzling equipment are set for serious financial trouble should fuel prices continue to rise.

While Kenya Airways, in a smart move by its top management, took out long-term hedging contracts on fuel, cushioning the ongoing upward pressure on crude oil prices, upstarts and small one or two aircraft operators in the region have become a punch ball for the oil companies after failing to take out such forward looking contracts themselves, either being unable to negotiate such complex deals or simply not knowing how to go about it.

Entebbe International Airport, for instance, is already one of the most expensive places for aviation fuel, both JET A1 and AVGAS and a series of increases in recent weeks have driven up the cost for airlines to nearly unaffordable levels.

Management of local upstart Air Uganda dropped a clear hint on its financial struggle, when it told the Daily Monitor June 5, 2008) that “fuel accounts for 65 percent.” Air Uganda was probably referring to its cost structure. “The current prices were pulling them into terrible distress,” Air Uganda said. “The fuel situation is pretty worrying.”

Indeed, worrying it has to be for Air Uganda, as it operates aged aircraft consuming substantially more fuel compared to what modern state of the art jets use per passenger/mile, and the airline’s present loadfactors are not helping. In fact, in a remarkable move, the airline’s commercial director was quoted last week saying the airline now intends to acquire smaller planes in the face of rising fuel prices. This was exactly the proposed start up strategy for the airline to commence operations with smaller city jets of a more recent age, but their then Italian management, obviously not knowing better, then caused to have this changed to use MD aircraft as operated by them in Italy.

As those aircraft, however, were not ready in time for the already postponed start up, in a grotesque move they settled for stone age first generation DC 9, which caused quite some consternation in Ugandan government and aviation circles at the time. Air Uganda at the same time announced that it would more than double its fuel surcharges from presently 20 to a proposed US$45.

In contrast, turboprop operators like Fly540, also flying twice a day between Entebbe and Nairobi, are said to be doing financially better as a result of operating a more fuel efficient fleet, leaving the question looming who will survive further fuel rises in coming months, should this be the case.

Fly540 is also awaiting delivery starting later this year of even newer ATRs, which will then also feature a business class section, matching existing services but for a slightly slower speed en-route, that however also making it substantially cheaper than their competitors across East Africa.

International analysts have already spoken of a speculative barrel price of US$200 and the thirst for oil products of emerging economies like China and India does little to keep global prices down in the face of sharply growing demand while production stays the same or is even said to be slightly reducing.

Meanwhile, global wealth keeps shifting at an ever faster pace to oil producing and exporting countries in particular in the Gulf region as Africa is likely to face yet greater economic challenges. Demands have therefore grown in the recent past for Gulf states to step up their international aid efforts and dedicate higher portions of their own national budgets to support countries hardest hit by the doubling of crude oil prices over the past year.