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The aftermath

As oil prices begin to fall, the aviation industry can finally breathe a tentative sigh of relief. But although costs have dropped from a massive US$148 to $91 per barrel, airlines are not out of the woods yet.
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As oil prices begin to fall, the aviation industry can finally breathe a tentative sigh of relief. But although costs have dropped from a massive US$148 to $91 per barrel, airlines are not out of the woods yet.

Many companies, particularly the smaller, less established carriers have been severely damaged by the astronomical prices and are still struggling to keep their heads above water, let alone make profit.

Though few airlines will be rushing to implement expensive expansion plans during the aftermath, several carriers have begun eliminating passenger charges that were introduced to cover costs. Air Canada has recently announced it will be dropping the $25 charge for second checked bags in response to falling prices.

Ben Smith, executive vice president and chief commercial officer says that despite the uncertain prices, reinstating the previous baggage policy is possible at present.

Andrew Cowen, CEO of Saudi Arabian low cost carrier, Sama, says the airline has put its elaborate expansion plans on hold until the future of fuel prices is more certain.

Despite a recent investment from shareholders, Cowen will be watching the pennies while he rides out what he hopes are the final few months of the oil storm. He adds that once the industry is more settled, aircraft prices are likely to fall, enabling the budget carrier to purchase more.

However not all airlines are as pleased by the latest turn of events. In recent months fuel hedging has become common place with some airlines requesting three to six month's worth of oil at a set price.

And while carriers stand to profit as oil prices soar, they can also lose a considerable sum as costs fall. US-based United Airlines has some 50% of its 2008 fuel hedged at $111 a barrel, but as prices drop the carrier must prepare itself for sizeable losses.

On the other hand some airlines have managed to hedge a much lower fuel price and as a result have saved millions of dollars during the crisis. Since 1998, Southwest airlines has spent some $3.5 billion less on kerosene than rival companies.

By hedging, carriers have insured themselves against rising prices. But in such a volatile environment the risk remains high and airlines must take this into account.

Lizzie Cernik is the assistant editor of Aviation Business.

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