SriLankan responds to fuel hikes

Crude oil prices which averaged around $75 per barrel in 2007 have shot up to $141 for the first half of 2008, recording an 84% increase. In January this year, a barrel of crude oil was $95, and has increased to $128 as at June 2008 which is an increase of 35%.

The speed at which world oil prices are rising is the biggest challenge for airlines. There is no time to manage the transition. While any business has to make sure its product reflects the cost of production, SriLankan is not passing on the total increase in the cost to its passengers.

It has, like most international airlines introduced a fuel surcharge with effect from 1st July 2008, but it will recover only 50% of the additional costs incurred. At this juncture of volatility and soaring prices, the most practical way to respond to the sharp increase in cost (fuel consists of 52% of the airline's cost as compared to 27% of the total cost last year) is by way of a fuel surcharge based on the distance.

Last year IATA (International Air Transport Association) predicted a record profit for 2008 for the airline industry $9.6bn - it is not to be. IATA has now predicted a total net loss of between $2.3bn and $6.1bn for the airline industry in 2008 depending on the level of the price of fuel. While this is the magnitude of the crisis caused within a year, the situation does not seem to be improving, despite analysts' predictions. This situation will eventually lead to a fundamental repricing of fares if fuel prices do not stabilize.