With jet fuel prices already readjusted by China Aviation Oil for the first time this year, Chinese airline companies are facing a huge increase in costs.

An official in charge of purchasing jet fuel for China Southern Airline said in a report by the China Business News that oil prices have been raised 210 yuan (US$29.14) per ton this time, only two months after last November’s price adjustment.

Jet fuel prices are mainly determined by factory prices, synthesis purchasing cost disparities and other price variables. China Aviation Oil adjusts the synthesis purchasing cost disparity on a quarterly basis in accordance with international oil prices. The State Development and Reform Commission (NDRC) regulates factory prices in tandem with gasoline and coal oil prices.

The higher synthesis purchasing cost disparity is an immediate trigger for rising oil prices at this time.

In the first three quarters of last year, the airline companies were happy to see oil prices fall. Yet in the fourth quarter of last year, China Aviation Oil and NDRC both raised their prices in response to fluctuations in the international market.

Early this year, China Aviation Oil wielded its power to raise prices again amidst the turmoil in the international oil market.

Jet oil is the most expensive part of any airline’s bill, accounting for over 30 percent of the total costs. An analyst with the CITIC Securities predicted that domestic airline companies including China Eastern Airline, China Southern Airline and Air China would suffer several hundred million yuan in losses for every one hundred yuan-increase per ton of oil. “Every percent decrease in fuel prices would save 42.45 million yuan for China Eastern Airline,” said Luo Weide, CFO of China Eastern Airline.

Another high official with China Eastern Airline said that the final effect caused by rising fuel oil prices should not be calculated until the airlines have raised their fuel surcharges to offset rising costs.

Apparently Chinese airlines won’t soon resort to fuel surcharges in the wake of climbing oil prices. Last November some airlines added a fuel surcharge of ten yuan for trips within 800 miles, and 20 yuan for trips more than 800 kilometers.

Industry analysts have pointed out that some airlines have tried to alleviate pressure by utilizing oil from abroad while on international flights; China Southern Airline faces a greater challenge because it has substantially less international flights.

Currently, China Eastern Airline has purchased one third of its required oil while flying internationally.

(China.org.cn by He Shan, January 26, 2008)