Sharp increase in oil prices casts a shadow over Vietjet Air, Vietnam Airlines and Bamboo Airways

World oil prices have increased sharply following the announcement of President Donald Trump about the possible exit from a nuclear deal with Iran. Fears of an embargo affecting the supply have pushed oil prices up to $71 per barrel, the highest level since 2015.

Transportation companies, which usually have a high proportion of fuel costs on operating expenses, are immediately impacted by the peak oil prices. For instance, taxi companies such as Vinasun, Mai Linh or airlines like Vietnam Airlines, Vietjet Air.

For Vietnam aviation industry, the gasoline price of Jet A1 used for all flights has increased 41.3 percent since the beginning of the year, reaching $85 per barrel in April.

Not only Vietjet Air but also Vietnam Airlines considers fuel prices as the top challenge for their operation in 2018. 

Vietnam Airlines estimates that fuel prices are expected to rise sharply and remain at a high price of $75 to $80 per barrel, an increase of 15 per cent to 20 per cent since 2017. Nevertheless, in reality, oil prices have escalated to $85 per barrel just after the first four months of the year.

The rapid increase in fuel costs has affected the anticipated profit of Vietnam Airlines. The airline estimated that its revenue would reach $3.1 billion in 2018, increasing approximately 9.4 percent.

However, the profit before tax of the airline only increased by $2 million, an increment of 2.5 percent.

The slow growth rate of profit comparing to its revenue partly reflected the impact of oil prices on Vietnam Airlines.

Bamboo Airways, a FLC Group-owned airline awaiting for permission, is also impacted by the rising fuel prices. 

Bamboo Airways has been dealing with many issues since its launch including failing to receive a license after nearly a year of filing, hiring planes to make timely takeoff and dealing with high fuel costs.

In order to deal with the swing of oil prices, airlines are adopting more price control methods. Particularly, Vietnam Airlines mentioned that the company will implement phase 2 of fuel-saving program and optimize routes and modes of flight.

Other airlines choose the option of buying hedging contract to control the risk of prices change. Hedging contract offers the purchaser with the certainty of fixed price for the commodity and secures a guaranteed sale price for the seller.

According to Vietjet Air, they have been using hedging contract since March when the crude oil prices reached $65 per barrel.

In theory, hedging contract is like an insurance helping the airlines to be less affected by the fluctuation of oil prices in the future. Nevertheless, it could become a double-edged sword to businesses if fuel demand is not anticipated correctly.

Jetstar Pacific Airlines is a prime example of the failing implementation of hedging contracts. According to the local media, in 2009, the airline lost $31 million when reserving gasoline in the period of very high oil prices.

ACBS Securities Company assumed that Vietjet Air will still be able to sufficiently manage its fuel cost in current situation.

Particularly, ACBS estimated that the gross profit margin of Vietjet Air will reduce only by 0.2 points coming to 15.3 percent because the increased cost will be compensated by the high profit margin from auxiliary activities. Besides, Vietjet Air can also transfer part of the extra cost into the ticket fair.

Even with several options given, if oil prices keep increasing, airlines profits will continue to be lessened, even resulting in losses.

According to statistics of the International Air Transport Association (IATA), when oil prices reached a peak of nearly $150 per barrel in 2008, the gasoline prices also increased significantly leading to the losses of many airlines.

Ho Chi Minh City Securities Corporation (HSC) believed that in the medium term, the prospects for oil prices will continue to increase.

The threat of Iran's embargo, the Venezuelan crisis together with the commitment to cut output from both oil and non-OPEC oil exporters could push the world into an oil shortage of 1 to 1.2 million barrels per day in the third quarter.