It is not difficult to see that the advantage of the international market is almost completely open and aviation is one of the industries that benefits the most. In the bright picture of the cross-border passenger transport sector, road and waterway passenger transport businesses are gradually improving profits, especially in 2023.
According to the General Statistics Office's October Socio-Economic Situation Report, in the first 10 months of 2023, passenger transport increased by 12.5% and turnover increased by 27.6% over the same period last year.
However, in the aviation industry alone, increasing revenue has not brought about the expected profits even though restructuring and internal cost reduction plans have been optimally implemented. The main reason lies in the fact that it is very difficult for businesses to be proactive with objective costs such as: escalating fuel prices, exchange rates and interest rates constantly changing in a negative direction, and geopolitical conflicts in the volatile international market.
Fuel prices are constantly fluctuating.
In the cost structure, fuel prices usually account for about 25-28% of the operating costs of airlines. However, when fuel prices increase, fuel costs have been pushed up to 36-38% of the total operating costs, even at a much higher level in the cost structure of low-cost airlines (LCC).
Updated data from airlines shows that the average fuel price in 2023 compared to 2015 (when the current airfare frame was applied) has increased by 58.6%, from an average price of 67.37 USD/barrel in 2015 to 106.86 USD/barrel in 2023. This development has caused airlines' costs to "erode" profits. For example, Vietnam Airlines' fuel costs in 2023 increased compared to 2019 at over 6,200 billion VND.
"In 2023, the jet fuel price is built at about 112 USD/barrel based on the forecast of Brent crude oil price, but the fuel price risk has been very unpredictable due to many uncertain factors in the world's macro economy, energy market and geopolitics. The jet fuel price only needs to increase or decrease by 1 USD/barrel to impact this year's fuel cost to increase/decrease by about 224 billion VND," an airline representative analyzed.
This is not just a problem for domestic airlines in Vietnam, according to the Financial Times , ticket prices on many routes have increased significantly in the past two years compared to pre-pandemic levels. Based on the latest data from aviation industry tracking company Cirium, the average ticket price on more than 600 of the world's busiest routes increased at an annual rate of 27.4% as of February 2023. This double-digit growth rate has lasted for 15 consecutive months.
Meanwhile, from the beginning of the year to November 2023, oil prices continued to increase. Based on this development, according to CNBC, major airlines such as Delta Airlines and American Airlines have lowered their third-quarter profit forecasts due to the impact of continuously rising fuel prices, increasing operating costs. To ensure business operations, many airlines around the world are forced to consider many cost-balancing options, including applying "fuel surcharges".
In fact, many airlines in Europe and America, including the Middle East, have adopted this option to reduce the pressure caused by fuel prices. Among them, TUI, a Belgian airline, has applied fuel surcharges to all ticket classes. The fees range from a few dozen euros to hundreds of euros per passenger for a round trip. This price adjustment has been the reality of the world aviation industry in recent years.
Butterfly effect from exchange rate difference
The foreign exchange market has also fluctuated constantly in recent years. Data shows that the exchange rate has increased by 9% from 21,900 VND/USD on average in 2015 to 23,900 VND/USD on average in 2023. With the increase of the USD in the world market, the difference in the domestic USD/VND exchange rate is calculated as an insignificant number but puts great pressure on airfares, especially for domestic airfares priced in VND and without fuel surcharges.
Vietnamese domestic airlines have tried to optimize costs in their business operations, but have not been able to change much. 70% of air transport costs are in foreign currency while ticket sales in Vietnam are in VND. A small difference in the USD-VND exchange rate can greatly affect the profits and business performance of airlines.
Like the butterfly effect, if the USD/VND exchange rate at the end of 2023 increases by only 1% compared to the expected accounting plan, it will reduce Vietnam Airlines' profit by about VND 200 billion due to the revaluation of long-term USD-denominated liabilities.
Despite still facing high input costs, domestic airfares in Vietnam are considered to be reasonably balanced. In particular, on many routes, airlines have proactively offered deep promotions to stimulate demand, bringing them down to the lowest level in the past 6 years during peak periods. The average airfare for the 2023 summer holiday has decreased by more than 10% compared to the same period in 2019.
But in reality, airlines themselves are still struggling to overcome this difficult period. If ticket prices are not adjusted, the revenue from maintaining the price of airline tickets will hardly be able to offset the impact of input costs.
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