Airline profit hopes fade with US$125 oil as US mulls ban

[LONDON] Airlines are seeing prospects for a strong profit rebound from 2 years of coronavirus turmoil rapidly slip away after the price of oil reached US$125 a barrel on Monday (Mar 7).

An oil shock triggered by Russia's war in Ukraine is the latest blow to carriers that have already had to cancel flights and reroute long-haul journeys to avoid shuttered airspace. The price of crude spiked after the US said it would consider a boycott of Russian supplies.

Earnings are at risk in Europe, where higher fuel costs will add to widespread flight disruption, while carriers in the US and Asia are largely unhedged and will feel the full impact of price rises.

Airline shares tumbled in all 3 regions, extending losses that have been piling up for the past several weeks. Oil neared US$140 a barrel at one point after the US said it was mulling a ban on Russian crude imports.

Disruption in Europe

Wizz Air Holdings, the biggest discount carrier in eastern Europe, reversed its no-hedging policy on Monday to protect from further increases in oil prices. The hedges will cap fuel-cost exposure for the next 4 months.

The Hungarian airline had already been cut off from Ukraine - one of its fastest-growing markets, and where 4 of its aircraft are trapped - and Russia's second city of St Petersburg. It will now limit its expansion plans this summer.

Other European airlines are feeling the pinch, with No 1 discounter Ryanair Holdings and German giant Deutsche Lufthansa altering schedules. Surplus jets will be redeployed into Western Europe, setting up a supply-demand imbalance. That threatens to hurt ticket prices in a peak summer season on which travel firms have been pinning hopes for a rebound.

More losses

Before the Ukraine conflict, the International Air Transport Association was considering narrowing its estimate issued last October for industry-wide losses of US$11.6 billion this year. That now seems unlikely.

In Asia, China Southern Airlines, the country's largest carrier, closed 8.3 per cent lower. The slump continued in European trading hours as Wizz Air dropped as much as 16 per cent before paring its losses to finish down 6.6 per cent. Discount rivals Ryanair and EasyJet lost 7.9 per cent and 7.5 per cent respectively.

Network airlines in the region also fell, before selling kicked in targeting US carriers. United Airlines Holdings, American Airlines Group and Delta Air Lines lost 6.8 per cent or more as of 12.29 pm in New York.

"Investors believe that airlines will likely pass on the spike in crude costs to consumers in the form of fuel surcharge but are worried about the price elasticity of demand," Citigroup analysts said in a research note Monday after meetings in the US.

Long-haul squeeze

Jet-fuel prices have surged 50 per cent year-to-date and are 74 per cent above 2019 levels.

Agency Partners analyst Sash Tusa said the squeeze will be worse for European network carriers like Lufthansa, British Airways owner IAG, Air France-KLM, Finnair and SAS, given the impact of diversions or lost routes and the fact that discounters generally have newer, more fuel-efficient planes.

"It damages long-haul airlines versus short-haul," he said. "A proportion of the international long-haul model is utterly broken as a result of not being able to overfly Russia."

Long-haul carriers in particular might now find it "very hard to get through 2022" without a return to equity fundraising, something that will be tougher for those that lack government shareholders.

Airlines have been guarded about the likely impact, with only Ryanair in Europe putting a number to it. Chief executive officer Michael O'Leary said last week that while the carrier is 80 per cent hedged at US$63 a barrel through next March, the unhedged requirement will cost it 50 million euros (S$74 million).

Clouded outlook

While analysts still expect most European airlines to make a profit in the year ahead, those estimates don't include the latest surge in crude. Hedges are much less robust in the second half, suggesting a greater financial hit if the crisis persists.

Air France-KLM, for example, has 72 per cent of first-quarter consumption hedged and 63 per cent for the following 3 months, according to an earnings presentation last month. But the proportion drops to 42 per cent and 28 per cent for the third and fourth quarters respectively.

Lufthansa said Thursday that the war has clouded prospects for a recovery and makes it impossible to provide an earnings estimate for 2022. The carrier is hedged on 63 per cent of its fuel needs for 2022 at US$74 a barrel.

Wizz's newly placed hedges cover 50 per cent of its March fuel requirement at US$1,172 per metric ton and 40 per cent of needs for the first quarter through June at US$1,142, compared with a Mar 7 spot price of US$1,300.

Its capacity for the next 2 quarters will be 30 per cent and 40 per cent above 2019 levels, after earlier targeting 50 per cent growth by summer, Sanford C Bernstein analyst Alex Irving said in a note. Wizz said it will continue to focus almost 2/3 of seats on central and eastern Europe.

Asia vulnerable

Most Asian carriers, including those in China, also aren't protected against oil price increases. After reporting huge losses in 2008, many airlines in the region reduced or abandoned hedging policies.

Among the few that still hedge are Cathay Pacific Airways and Singapore Airlines, though they reduced their exposure after the pandemic wiped out travel demand.

As tough as the operating environment is becoming for global airlines, Russian flag carrier Aeroflot faces an even starker future, with many overseas routes cut off and sanctions hitting its supply of new and leased planes. BLOOMBERG