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Feature: Aviation sector hopes for OPEC relief from vertiginous fuel prices

London — It has weathered sharp fuel price rises in the last year, but the airlinesector, seeing storm clouds over the global economy, is increasingly focusedon the commodity that is its biggest single expense and hopes for relief fromthis week's meeting of crude oil producers in Vienna.

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* Fuel now back as sector's biggest cost: IATA

* Looming trade war compounds worries

* Cargo business still shows post-crisis weakness

As OPEC and other major oil producers gather to decide whether to easeoff on output cuts increasingly portrayed as an over-reaction to pastabundance, airlines have an especially strong interest in the outcome.

Industry officials note that jet fuel prices have risen by more than 50%just in the last year, and say that when it comes to optimizing operations,they are near the end of the runway.

There is also talk of a return to fuel price surcharges, a practice thatbecame common in the last decade, although unpopular with travelers andincreasingly policed by government regulators.

Leading airlines have boasted dramatic improvements in fuel efficiency inrecent years, thanks mainly to improved aircraft design as well as moreefficient utilization to prevent empty seats.

But after a slight slippage, fuel is "now back" as aviation's biggestcost component, likely to amount to 25% of overall operating costs this year,industry group IATA's chief economist, Brian Pearce, told S&P Global Platts.The share is even greater for some long-haul airlines -- fuel amounts to30-35% of total costs at Dutch airline KLM, roughly level with human resourcescosts, a source there said.

"We're looking at the OPEC meeting, we're looking at what's happening inTexas" with shale oil production, Pearce said in a telephone interview. "Fuelprices have been rising for some time. Airlines have been able to offset someof it by better utilization of aircraft -- really by filling up the planes --but there's a limit to that."

The sector does have the cushion of a recent upturn in part attributed tocheaper oil after crude prices collapsed in 2014 -- the peak year for theindustry was 2016, Pearce said. Low prices caused jet fuel consumption to riseeven in the OECD group of developed countries, which are usually associatedwith moderate consumption and rising fuel efficiency.

OECD jet fuel consumption rose by around 600,000 b/d between 2012 and2017, according to the International Energy Agency.

But there are limits to how much airlines can further improve theirutilization of aircraft. In April passenger load factors hit a record high forthe month of 82.3%.

Last month Willie Walsh, CEO of industry giant International AirlinesGroup, which includes British Airways, said higher fuel prices could proveunbearable for some participants and lead to consolidation. Such perceptionshave prompted an overall fall in the share prices of the airline sector thisyear.

TRADE WAR LOOMING

One factor compounding industry worries is the looming trade war betweenChina and the US. The immediate concern is what this could do to airlines'cargo businesses, which have already experienced a slowdown since the middleof last year, and still bear the marks of slow growth in global trade sincethe global financial crisis, Pearce said. But ultimately, trade wars couldalso lead to reduced passenger numbers, he added.

While airlines can generally cope with fuel price rises in times ofeconomic growth, they struggle in times of economic weakness, he said. "Worldtrade is still much weaker than you would expect it to be. Countries are nolonger as open as they were. There's a risk now that we see trade warspossibly escalating. That's very negative for the cargo industry," he said."It could start affecting passenger flows as well."

Airlines do have the ability to introduce fuel price surcharges,something Qatar Airways CEO Akbar Al Baker warned was on the horizon in arecent interview with the Business Traveller website.

For the airlines it does not help that their schedules are fixed throughto October, so their ability to make changes in response to any near-termprice rises is limited, Pearce said.

Nor is airlines' ability to hedge the prices they pay for fuel acure-all, Pearce added. Hedging is mostly associated with European airlines:Lufthansa told Platts it hedged its fuel up to 24 months ahead and protecteditself through better operating performance, but added it expected a more"challenging" year this year.

Pearce estimated European airlines have hedged 50-80% of their fuel costsfor this year, while the figure is close to zero for North American andChinese airlines.

Pearce rejected the idea that reluctance to hedge was a failing on thepart of North American airlines, noting they were no less sensitive to fuelprices than others, evident in Delta Airlines' purchase in 2012 of its ownrefinery, Trainer, in Pennsylvania, in an effort to more effectively managecosts.

Hedging brings its own disadvantages, limiting airlines' ability tocapture price reductions, and North American airlines have upped their gamegenerally, partly under pressure from new competitors on North Atlanticroutes, he said. "A lot of improvement has come from much better management ofthese companies," he said.

--Nick Coleman, nick.coleman@spglobal.com

--Edited by Alisdair Bowles, newsdesk@spglobal.com