Rising Cost of Fuel Threatens Airline Recovery

The rising cost of fuel is threatening the airline industry’s already slow recovery. Since the pandemic started, the aviation industry is among the most affected sectors when governments restricted travel.

This week, oil prices reached its highest levels in the last seven years, and this triggered concerns from the aviation industry. While the airline industry grapples with low travel demand, the price of jet fuel has doubled since last year. Jet fuel was at $94.60 per barrel last October 8 according to the International Air Transport Association. That represents a 5.8% jump from the previous week.

Delta Air Lines’ sees the final quarter of the year as a challenge mainly due to the price of jet fuel. The airline’s CEO Ed Bastian said that “Fuel prices continue to rise, which will pressure our ability to remain profitable”.

In third quarter alone, fuel costs accounted for almost 20% of Delta Air Line’s adjusted operating expenses. According to Delta, every 5 cent increase in the price of fuel drives their operation cost by around 40 million.

Rising Cost of Fuel and Low Travel Demand

Before the pandemic, it’s common for airlines to pass the burden to their passengers by raising ticket prices. Bastian said that “There’s nothing we can do to keep fuel prices down”. He added that “What we need to work on is our ability to include that in our pricing”.

However, some airlines can’t just increase ticket prices. As travel demand remains low, some airlines are trying to lure customers with low fares.

And to make matters worse, some airlines stopped fuel hedging when the oil prices bottomed last year. Ryanair paid the price and suffered a loss of almost $1.1 billion due to fuel hedges that weren’t needed because of the COVID19 pandemic.

According to its chief executive Michael O’Leary, “A defective hedge last year cost nearly 900 million euro so I will never hedge 90% of my current monthly requirements ever again”.

Mark Simpson who is an aviation analyst at GoodBody said that “Most airlines suffered huge losses from fuel hedges last year as demand imploded in the face of the COVID pandemic”. He added that “they were left holding contracts for delivery at prices well above spot”.