Pandemic-weary airlines now face a fuel crisis that could bring even more pain and higher airfares for travelers
U.S. airlines endured one of the most difficult times in their history during the pandemic as air travel was brought to a near standstill, pilots and workers were in short supply, and stock prices cratered.
Now they’re staring down yet another crisis as jet fuel prices soar following Russia’s invasion of Ukraine.
For consumers, the increasing cost of fuel will mean higher travel expenses, as airlines pass on rising costs. Airfares are expected to rise 7% each month until June, according to estimates from the price-booking mobile app Hopper.
“I think it’s going to be very difficult for most airlines for the next 12 months,” Ryanair CEO Michael O’Leary told the Financial Times. “We have dealt with the pestilence, only to be visited with a war.”
Airlines are still recovering from their financial losses during the pandemic.
U.S. airlines posted an after-tax net loss of $35 billion in 2020 alone, according to data from the Bureau of Transportation Statistics. And globally, the 50 largest airlines saw their net debt reach $320 billion the same year, according to an FT analysis based on data from the financial data firm FactSet.
United Airlines’ stock sank roughly 75% from February 2020 to May 2020, while American Airlines and Delta both saw their shares drop over 65% during the same period.
Taxpayers came to the rescue at the height of the pandemic, as three separate rounds of taxpayer funding, totaling $54 billion, paid much of U.S. airlines’ payroll costs for an 18-month period.
Airlines had begun to make a recovery over the past six months as pandemic restrictions eased. Some estimates even predicted global air travel demand could recover to 84% of 2019’s figure in early January, but now they are facing yet another challenging situation.
Jet fuel’s historic rise and falling stock prices
Russia’s invasion of Ukraine in late February sent oil prices well above $100 per barrel, affecting everything from shipping prices to jet fuel.
Jet fuel costs have jumped 27.5% in the last week, to levels around 96% higher than they were a year ago, according to data from the International Air Transport Association (IATA).
Fuel costs represent roughly 20% to 30% of airlines’ operating expenses, according to the U.S. Department of Energy, meaning there will be serious cost increases for the industry ahead.
Aside from higher fuel costs, the Russia-Ukraine conflict has reduced overall demand for air travel, especially in Europe.
Flight searches are currently 9% below expected seasonal levels, and European airfare costs jumped 16% month over month through the first week of March, according to a new report published on Tuesday on how the Russia-Ukraine conflict is impacting travel.
As a result of the war and subsequent commodity spikes, airline stocks have taken a hit over the past month. United Airlines stock is down over 27% in the period, while shares of American Airlines and Delta have fallen roughly 23% and 25% respectively.
Brent crude oil prices, the international benchmark, fell roughly 12% on Wednesday in a reprieve after the commodity touched 14-year highs earlier in the week. The move helped airlines recover some of their recent losses, but challenges remain.
To hedge or not to hedge, that is the question
One interesting factor in the rising price of jet fuel is the difference in the way jet fuel cost increases will affect individual airlines.
While some airlines hedge their jet fuel expenditures, purchasing months of reserves in advance, others do not, leaving them exposed to rising prices.
European low-cost carriers Ryanair and Wizz Air are the perfect example of the difference in strategy. Ryanair has hedged 80% of its expected fuel needs at $65 per barrel of oil until March 2023, meaning that it can continue flying with that cheaper fuel. But Hungarian rival Wizz Air does not have a big store of cheap gas and will be hit hard by higher prices. Wizz cut 7% of its flights in March as a result of its lack of fuel hedging.
Still, hedged or not, rising jet fuel costs will undoubtedly be a headwind for airlines moving forward.
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