Big Oil Majors production cuts, what this means to airfares

The recent move by the Big Oil Majors to cut production by over one million barrels a day as a “precautionary” measure to stabilize the oil market will have a domino effect on airfares, according to industry experts.

The Organization of the Petroleum Exporting Countries (OPEC) yesterday announced plans to lower oil production by 1.16 million barrels per day, starting next month, which has already led to a surge in oil prices. This reduction in oil production will lead to a decrease in the supply of oil, driving up the price of oil, which will ultimately impact the cost of airline operations.

As airlines rely on oil as an essential component of their operations, an increase in oil prices will lead to an increase in the cost of airline operations. This increase in operational costs would then be passed on to consumers in the form of higher airfares.

Pinyot Pibulsonggram, head of commercial at Thai Vietjet, said that the situation could affect ticket prices in the market for the next three to six months, with the low tourism season typically between June and September.

Airfares could potentially become more expensive than during the cool season and the upcoming Songkran holiday, as airlines downgraded ticket prices for those periods because of lower fuel surcharges, Bangkok Post reported.

Pinyot further explained that fuel prices typically comprise a large portion of airlines’ operational costs, around 20-30%. Therefore, airlines need to evaluate their operations and seek methods to offset fluctuating fuel prices.

Thai Vietjet’s strategy is to gain higher passenger volumes during the low season to maintain airfares and keep the airline competitive in the market. Pinyot said…

“The average load factor should run above 85%, exceeding the usual low season rate of 80%. Increasing flight capacity to draw more inbound foreign tourists is crucial as the strategy can help drive Thailand’s economy.”

Yuthasak Supasorn, governor of the Tourism Authority of Thailand (TAT), said that before OPEC’s announcement, fuel prices and airfares were lower as flight capacities were ramping up. He said…

“If fuel prices continue to rise, airfares might become unaffordable for tourists. The tourism industry needs more flight frequencies as increasing revenue from passengers could offset high fuel prices. The TAT expects to welcome at least 25 million foreign visitors this year.

The recent reduction in oil production will undoubtedly impact airfares, and tourists may have to pay more to travel to their favourite destinations.

Airlines need to come up with innovative ways to offset the high cost of fuel and maintain competitive airfares. Passengers, on the other hand, may need to plan ahead, book their tickets early, and explore alternative travel options to avoid the impact of rising airfares.