By Wang Shen
Starting from June 5, the bunker adjustment factor (BAF) will be charged again for domestic routes, which had been ceased for three years, as reported by the 21st Century Business Herald.
On June 4, Air China, China Eastern Airlines, and Kunming Airlines first announced that they would charge the BAF at RMB 10 per adult passenger. Other airline companies will also resume charging the fee soon.
The BAF is an additional fee to hedge against an incremental cost due to an increased oil price. In 2015, the National Development and Reform Commission and the Civil Aviation Administration of China announced that airline companies need to charge the BAF fee for domestic routes when the oil price reaches RMB 5,000 per ton.
Recently, the oil price has increased. By the end of May, the oil price had exceeded RMB 5,000 per ton, which means airline companies need to start charging the BAF fee.
Airline companies should set their amount for the BAF fee independently and report it to the Civil Aviation Administration of China. They also should strictly follow the standard formula, published by the National Development and Reform Commission, to calculate the highest amount for the BAF. China Southern Airlines stated that normally, the BAF fee could cover 65 percent to 75 percent of its oil cost.
Oil cost is the largest cost for airline companies. Take China Southern Airlines as an example. In 2016, the oil cost accounted for 24.7 percent of its total costs and the number reached 28.56 percent in 2018.
Since oil cost accounts for a large proportion of the total costs, an increase in oil price will greatly affect airline companies' profitability and performance. China Southern Airlines estimated that if other variables stay the same and the oil price increases or decreases by 10 percent, its operating costs would increase or decrease by RMB 3.19 billion.
