Just as the airline industry showed signs of improvement, the current Russia-Ukraine crisis has added another layer of complexity to the path of recovery. Oil prices were already high, but the present conflict has made the situation even worse. With the aviation sector already weakened by the COVID pandemic, just how severe a blow will the oil shortage be for the industry?
High operational costs
An airline's profitability depends directly on how low it keeps its operational costs. While most of the costs are somewhat manageable, one that influences the balance sheet the most is fuel.
With countries banning oil imports from Russia, airlines are worried about what it might do to oil prices. Indeed, the volatility in oil prices is already visible. Brent Crude price touched almost $140 a barrel on Sunday for a brief moment, and it's being said that it could cross its last highest mark of $147.50 a barrel back in 2008.
It's impossible for airlines to absorb such a huge load entirely, particularly when oil accounts for such a massive proportion of operating costs, up to 40% in some markets.
Already ticket prices have increased in many markets such as India. A senior airline official cites the Delhi-Mumbai sector as one example to explain the rise, saying that the airfare range for flying between Delhi and Mumbai is likely to rise from around Rs 2,300-13,000 currently to around Rs 2,900-15,000 in the coming few days.
Market fluctuation was already affecting the sector in Nigeria, with Azman Air having to cancel many flights in February due to fuel shortage, and that was before the Ukraine crisis. Some international airlines, such as AirAsia and some Chinese carriers, have already passed on the high fuel prices to customers as increased fuel surcharge.
Could it slow recovery?
Over the last two years, airlines have struggled to fill seats due to the fear of the virus and complicated traveling rules. With COVID gradually subsiding all over the world, there was renewed hope of a bounce-back of traffic.
While current trends do not suggest an immediate impact on passengers wanting to fly again, a sustained price hike could hamper the long-term recovery of the sector. An oil price hike impacts almost every industry, resulting in commodities becoming more expensive and people becoming more conservative while spending money.
Passengers are likely to think twice before spending too much on increased airfare and might decide to wait for prices to drop.
Some airlines have protection, but for how long?
Some carriers rely on fuel hedging by locking in prices with companies for an extended period of time. These airlines may be protected from immediate impact but may not sustain for long if fuel shortage continues to drive the prices high.
According to Reuters, AirFrance-KLM has hedged 72% of oil consumption for the first quarter and 63% for the second quarter at $90 a barrel. Cathay Pacific has hedged its entire first-quarter consumption and about half of its expected second-quarter consumption. IAG is hedged against price hikes for much of 2022 as well.
But what about some US carriers that dropped the practice when oil prices went down? American Airlines and Delta are fully unhedged and could see their balance sheet suffer in the long term.
The Russia-Ukraine crisis has undoubtedly thrown the aviation industry in a tailspin. With air routes suffering due to Russian sanctions and now oil prices threatening to break records, the coming few weeks seem quite turbulent for most carriers around the world.