SriLankan Airlines has introduced a fuel surcharge on all airline fares beginning July 1, 2008. The decision to increase fares is due to the unprecedented rise in world fuel prices.

Crude oil prices, which averaged around USD 75 per barrel in 2007, have shot up to USD 141 for the first half of 2008, recording an 84% increase. In January of this year, a barrel of crude oil was USD 95 and has increased to USD 128 as of June 2008, an increase of 35%.

The speed at which world oil prices is rising is the biggest challenge for all airlines. There is no time to manage the transition. While any business has to make sure its product reflects the cost of production, SriLankan is not passing on the total increase in the cost to its passengers. It has, like most international airlines, introduced a fuel surcharge, effective July 1, 2008, but it will recover only 50% of the additional costs incurred. At this juncture of volatility and soaring prices, the most practical way to respond to the sharp increase in cost (fuel consists of 52% of the airline’s cost as compared to 27% of the total cost last year), is by way of a fuel surcharge based on the distance.

The surcharge differs according to the destination. The surcharge for long haul flights – Europe/Colombo, Europe/Far East, Europe/India, Europe/Male, Far East/Mid East and Tokyo/Male will be $80 one way; medium haul flights – within India, Bangkok/HongKong, Bangkok/Beijing, Dubai/Kuwait and Bombay/Karachi will be $45 one way; and for short haul flights – Far East/Colombo, Far East/India, Mid Ewast/Colombo and Mid East India will be $25 one way.

Last year IATA (International Air Transport Association) predicted a record profit of USD 9.6 billion for the airline industry for 2008. This is not to be. IATA has now predicted a total net loss of between USD 2.3 billion and USD 6.1 billion for the airline industry in 2008 depending on the level of the price of fuel. While this is the magnitude of the crisis caused within a year, the situation does not seem to be improving despite analysts’ predictions. This situation will eventually lead to a fundamental re-pricing of fares if fuel prices do not stabilize.