Soaring fuel prices heighten the risk of stalling aviation recovery

WHEN a senior executive at a carrier from the oil-rich United Arab Emirates remarked that jet fuel prices are now “way above” what airlines can manage, it is time for investors to sit up and take notice. The aviation industry’s nascent recovery is facing a heightened risk of being stalled.

Emirates chief commercial officer Adnan Kazim was recently quoted by Nikkei Asia as having said that jet fuel is making it tough for airlines to turn a profit. He said jet fuel — the biggest single expense item and typically accounting for 20-30 per cent of total costs — needs to be at US$50-70 a barrel if airlines are to cope.

Prices are now more than double that, having risen 7.9 per cent week on week to US$158 a barrel last week, noted the International Air Transport Association (Iata). At an average price of US$136.80 year to date, Iata estimated this would translate into an impact of US$122.8 billion on the industry’s total fuel bill for 2022.

Feeling the heat, Emirates has levied a fuel surcharge on air tickets and has raised that surcharge at least twice since March — to the annoyance of passengers, especially those who have had to stump up cold, hard cash for the surcharge when they redeem air tickets with miles.

Many of the Dubai airline’s peers, both full-service carriers and budget airlines, have also started to impose or re-impose fuel surcharges, with some pegging the rates to the price of jet fuel.

Singapore Airlines (SIA) does not have a fuel surcharge on passenger flights at the moment.

The mainboard-listed flag carrier’s spokesperson acknowledged that its bottom line could be hit by higher fuel costs. “Higher fuel prices will have an impact on our profitability, as we may not be able to fully mitigate the increase in cost via fuel hedging (and gains from close-out swaps) or increase in fares,” the spokesperson added.

The airline group is hedged in Brent at about 40 per cent of expected consumption at an average price of US$60 per barrel between April 2022 and June 2023. The hedge positions beyond that have been closed out, locking in gains of US$225 million for FY2023 to FY2025 on a cash-settled basis. The gain to be recognised as income in future periods would amount to US$208 million.

The group had hit the brakes on hedging in 2020, after having incurred significant hedging losses when oil prices tanked as the world went into a lockdown mode to stamp out the coronavirus.

SIA said that it will evaluate its options as it continues to monitor market conditions. Earlier, the group had also said it would maintain “appropriate” discipline over cost even as it ramps up capacity.

Some airlines have chosen to cope by reducing flights. Qantas Airways, for instance, is flying a little less on the domestic front to “rebalance” capacity and airfares, in order to cover the cost of surging fuel prices.  More drastic measures, including grounding flights, were contemplated by Nigerian airlines last month, as elevated fuel prices have made flying unprofitable for them.

These higher fuel expenses are coming just as the airlines, having been bruised by the pandemic for 2 years, are increasing flight frequencies and routes to capitalise on the pent-up demand that has been unleashed by border reopenings. Many are also trying to capture market share from peers that are still constrained by closed border policies.

While airlines would be able to mitigate elevated fuel expenses somewhat by a fuel surcharge, the total cost of flying could price out some travellers and dampen demand from discretionary travel, leading to a drop in air travel and impacting the carriers. If airlines absorb a big proportion of the fuel price, this would hurt their profitability — at a time when they are still repairing their debt-laden balance sheets.

Given all these crosswinds, the recovery of the airlines is almost certain to be impacted.