Airlines ‘nowhere near’ Covid-style crisis despite oil shock: Iata chief

[SINGAPORE] The oil shock currently faced by the global airline industry is not an existential threat and falls “nowhere near” the crisis of the Covid-19 pandemic, said International Air Transport Association (Iata) director-general Willie Walsh on Wednesday (Apr 8).

Speaking at a press conference at the Iata World Data Symposium in Singapore, he dismissed the notion that airlines are in “survival” mode following the recent spike in oil prices.

Oil prices have risen by about 140 per cent since the Middle East conflict broke out on Feb 28, with the destruction of oil infrastructure in the region and closure of the vital Strait of Hormuz.

Walsh’s comments came after airline CEOs earlier in the day warned that jet fuel prices could take months to stabilise.

“This is not a crisis that is anywhere close to what we experienced in Covid,” he said. “I don’t think it’s an existential challenge for any airlines out there. If there are failures, those airlines are likely to have failed regardless of whether the oil price had gone up or not.”

Among the levers the industry could use to navigate the spike in costs are higher ticket prices and flight cuts, said Walsh, who is set to become the CEO of Indian carrier IndiGo in August. 

For example, airlines are likely to trim flight frequencies to reduce their exposure to spot jet fuel prices.

“If you don’t fly, you don’t use the fuel,” said Walsh.

He added that the sector has historically proven it can remain profitable even when oil prices soar past US$130 a barrel. He pointed to the years 2011 to 2013, when geopolitical crises such as the Arab Spring and sanctions on Iran disrupted oil supply.

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This time around, Walsh said that airlines’ “immediate challenge” is the losses incurred from the lag time between the sudden fuel price spike and the ability to adjust airfares for future bookings.

Because millions of tickets for upcoming travel have already been sold, he noted that carriers cannot rely on retroactive fuel surcharges to recoup immediate losses.

While futures markets indicate that crude oil prices could drop back below US$80 a barrel by the end of the year, he said that the price of refined jet fuel is likely to remain “slightly elevated” due to the extensive damage to Middle Eastern refinery infrastructure.

Short-lived boost for Asian carriers

Airspace closures due to the war have disrupted flights by Middle Eastern carriers such as Emirates and Etihad. These carriers represented about 14.6 per cent of international flight volumes before the conflict began.

Airlines outside the region, including those in Asean, have redeployed planes to capture displaced traffic, but Walsh said that the increased demand for Asian and European carriers is unlikely to be permanent. 

He expects Gulf hubs such as Dubai and Doha to bounce back swiftly once geopolitical tensions ease.

Consequently, Asean hubs including Singapore’s Changi Airport, Thailand’s Suvarnabhumi Airport and Malaysia’s Kuala Lumpur International Airport – which are already pushing against their on-paper passenger traffic limits – are unlikely to be overwhelmed by a sustained, long-term rerouting of passengers through their gates.

Despite the short-term disruptions and elevated fares, underlying passenger demand for the aviation sector remains robust, said Walsh. He does not foresee a widespread “demand destruction” – with a permanent decline in demand – that would trigger a deeper and longer-lasting industry contraction.