KUALA LUMPUR: The rising oil prices will not preclude the recovery of airline profitability during and post-pandemic, said Moody’s Investors Service (Moody’s).

       In its sector comment, the research house said supply and demand fundamentals -- including the return of passengers, supported by increasing vaccinations and less stringent barriers to travel -- will have a greater influence on airlines' earnings than jet fuel prices, which will fluctuate with changing Brent oil prices.

       "Aircraft fuel is one of the largest operating costs for most airlines, along with salaries and related costs.

       "When Brent averaged about US$100 per barrel in 2013, aggregate fuel expense for the United States (US) airlines was about 32 per cent of revenue,” it said, adding that in 2016 and 2019, fuel expense was about 16 per cent and about 20 per cent of revenue, respectively.

       Moving forward, Moody’s said aligning airline capacity with customer demand and effective revenue management practices -- selling seats at various intervals before departure dates at prices that promote profitability -- will be the most influential drivers of airline profitability at this time of recovering customer demand.

       It said many variables influence ticket prices, such as operating expense bases, increased costs, competitive capacity on given routes and demand.

       "We expect demand will see a boost in the coming months as the US opens its borders to vaccinated international air travellers this November,” it added.

       Moody’s noted that as oil prices rise, the cost of marginal flying increases, and in normal times, airlines will raise fares.

       "However, there is a timing mismatch as today's sales will be flown in the future, when the price of jet fuel may be higher or lower than on the date the tickets were sold.

       "While the lag means that airlines cannot perfectly offset fluctuations in oil prices, in normal times, airlines will, over time, raise fares to cover the incremental cost,” it said.

       Alternatively, if the market dynamics do not support higher prices, leading to lower demand, airlines will reduce capacity.

       "Airlines' practices will differ during the recovery from the pandemic. They are likely to maintain capacity additions during periods when demand is weaker than expected, as individual airlines focus on restoring their networks,” it said. - Bernama