Surging oil prices slow down aviation’s recovery
The post-pandemic recovery of some airlines could be badly affected by the ongoing increase in oil prices.
Prices today hit $130 per barrel, the highest level since 2008, amid fears of tightening supplies as both the US and Europe weigh in on a Russian oil ban after the Kremlin waged war in Ukraine.
According to aviation analyst Alex Macheras, the increase in fuel prices will have a direct effect on tickets.
“Fuel accounts for between 35 and 40 per cent of an airline’s operating costs, it is inevitable that the increased costs will eventually trickle down to passengers,” he told City PM
“For some airlines who hedged out about 80 per cent of their fuel needs, they’ll still be able to pass on low fare to passengers for the upcoming summer season, but eventually this will push fares prices up and that’s not what the industry wanted as it recovers from the worst of the pandemic.”
Despite a 3.95 per cent slump in share price, Ryanair expects to maintain tariffs low.
“We will be nicely insulated from that for the next 12 months, as we are 80 per cent hedged out to March 2023 at about $63 a barrel and so we’ll be able to pass those very considerable fuel savings to our customer in the form of lower airfare,” said on Wednesday chief executive Michael O’Leary.
According to O’Leary, the remaining 20 per cent that still needs to be bought will cost approximately €50m, slowing down recovery.
“Although we do have a 20 per cent [to be bought] and that will cost us probably another €50m over the next 12 months, which is not a huge amount but it certainly makes the post-Covid recovery much more difficult,” he added.
Wizz Air has for the moment capped fuel exposure with zero hedges, but expect the fare environment “to harden more broadly across the industry,” while Easyjet announced at the end of January it had hedged out 60 per cent of its fuel needs for the financial year to 30 September.
Long-haul carriers – including Virgin Atlantic – were not left unscathed.
“Our focus is on our customers and giving them the best service and experience at the most competitive price possible,” a Virgin Atlantic spokesperson told City PM “Due to the rising cost of oil, we have recently increased our carrier surcharges by £30 and will continue to monitor the situation and keep surcharges under review.”