| Beyond the Tarmac |
Just as the global airlines were beginning to recover from Covid-19 restrictions in many parts of the world, soaring jet fuel price slammed carriers and travellers with steep cost increases, presenting a not-so-rosy outlook for the pandemic-hit industry.
Global jet fuel prices have surged to near 14-year highs in line with crude oil's surge on supply shortfall worries following the Russian invasion of Ukraine last month.
Trading has been extremely volatile since Russia invaded Ukraine nearly a month ago.
Jet fuel prices lurched to highest level since 2008, clearly outperforming crude on tight supply worries.
The global body of airlines – IATA estimate shows that jet fuel averaged $112.5/b year-to-date (ytd). This, it said will have a $82.1bn impact on the airline industry’s 2022 fuel bill.
The Organisation of the Petroleum Exporting Countries (Opec) recently said oil demand in 2022 faced challenges from the invasion and rising inflation as crude prices soar, increasing the likelihood of reductions to its forecast for robust demand this year.
Although global crude oil benchmark Brent spiked to nearly $140 a barrel (for the first time since July 2008) on March 7, both Brent and US crude futures benchmarks settled below $100 a barrel (for the first time since late February) on March 15.
Already, jet fuel prices have spiralled, leaving global carriers who have already been hammered by Covid-19 over the last two years, having to pass on higher costs via fuel surcharges and increased fares.
In turn, fare hikes risk undermining an air travel recovery that has gained momentum as international border curbs ease.
"Travelling (by air) is not going to be cheap from now onwards. With the inflation across countries, most people have shallower pockets, less disposable income," Reuters said quoting a Singapore-based jet fuel trader.
Jet fuel represents the single biggest element of an airline's cost base, which means a marginal change in crude oil prices can significantly impact its profitability.
Fuel is a major cost component of operating an airline, often accounting for 20-30% of operating costs, according to OAG, a UK-based global travel data provider.
So, a rise in fuel costs of this scale (70% up on a year ago) means airlines have to reduce costs elsewhere or increase fares, OAG said and noted, “In the current operating environment neither is easy.”
Jet fuel prices have long driven airline profitability and the aviation industry as a whole, representing between 14% and as much as 31% of airline operating costs in the past decade, an IATA estimate shows.
One report, however, suggests 40% of the raw material cost in any airline, is for jet fuel or aviation turbine fuel (ATF).
Consequently, airlines hedge a large portion of their annual fuel consumption at lower oil prices in order to protect themselves from the volatility in oil prices.
According to India’s prominent broadcaster NDTV Profit, aviation turbine fuel surged 63% over the past year to a record high.
This is an obvious worry for airlines as fuel accounts for a lion's share of their operating expenses.
To combat this, airlines in India have opted to pass on the rising cost of jet fuel to passengers, leading to a sharp rise in airfares. As demand grows, prices are also expected to rise further, it said.
If the price of oil continues its upward rally, it would lead to an increase in aviation turbine fuel prices. Rising ATF prices will have a direct impact on the company's profitability.
“Airline stocks are very sensitive to the movement of crude oil prices,” NDTV Profit noted.
An issue that is on the minds of airline management teams at the moment relate to the rising cost of oil, and jet fuel in particular, noted Willie Walsh, IATA Director General.
“Fuel represents the single biggest element of an airline's cost base. So clearly, you know, this is something that airlines will be closely monitoring.
“And given what we have seen over the last couple of years, it is unlikely that most airlines will have significant hedging in place to protect them against this increase in the oil price. So I think this will be a factor certainly playing into fares as we go through the year if the oil price remains high,” Walsh noted recently.
Global jet fuel prices have surged to near 14-year highs in line with crude oil's surge on supply shortfall worries following the Russian invasion of Ukraine last month.
Trading has been extremely volatile since Russia invaded Ukraine nearly a month ago.
Jet fuel prices lurched to highest level since 2008, clearly outperforming crude on tight supply worries.
The global body of airlines – IATA estimate shows that jet fuel averaged $112.5/b year-to-date (ytd). This, it said will have a $82.1bn impact on the airline industry’s 2022 fuel bill.
The Organisation of the Petroleum Exporting Countries (Opec) recently said oil demand in 2022 faced challenges from the invasion and rising inflation as crude prices soar, increasing the likelihood of reductions to its forecast for robust demand this year.
Although global crude oil benchmark Brent spiked to nearly $140 a barrel (for the first time since July 2008) on March 7, both Brent and US crude futures benchmarks settled below $100 a barrel (for the first time since late February) on March 15.
Already, jet fuel prices have spiralled, leaving global carriers who have already been hammered by Covid-19 over the last two years, having to pass on higher costs via fuel surcharges and increased fares.
In turn, fare hikes risk undermining an air travel recovery that has gained momentum as international border curbs ease.
"Travelling (by air) is not going to be cheap from now onwards. With the inflation across countries, most people have shallower pockets, less disposable income," Reuters said quoting a Singapore-based jet fuel trader.
Jet fuel represents the single biggest element of an airline's cost base, which means a marginal change in crude oil prices can significantly impact its profitability.
Fuel is a major cost component of operating an airline, often accounting for 20-30% of operating costs, according to OAG, a UK-based global travel data provider.
So, a rise in fuel costs of this scale (70% up on a year ago) means airlines have to reduce costs elsewhere or increase fares, OAG said and noted, “In the current operating environment neither is easy.”
Jet fuel prices have long driven airline profitability and the aviation industry as a whole, representing between 14% and as much as 31% of airline operating costs in the past decade, an IATA estimate shows.
One report, however, suggests 40% of the raw material cost in any airline, is for jet fuel or aviation turbine fuel (ATF).
Consequently, airlines hedge a large portion of their annual fuel consumption at lower oil prices in order to protect themselves from the volatility in oil prices.
According to India’s prominent broadcaster NDTV Profit, aviation turbine fuel surged 63% over the past year to a record high.
This is an obvious worry for airlines as fuel accounts for a lion's share of their operating expenses.
To combat this, airlines in India have opted to pass on the rising cost of jet fuel to passengers, leading to a sharp rise in airfares. As demand grows, prices are also expected to rise further, it said.
If the price of oil continues its upward rally, it would lead to an increase in aviation turbine fuel prices. Rising ATF prices will have a direct impact on the company's profitability.
“Airline stocks are very sensitive to the movement of crude oil prices,” NDTV Profit noted.
An issue that is on the minds of airline management teams at the moment relate to the rising cost of oil, and jet fuel in particular, noted Willie Walsh, IATA Director General.
“Fuel represents the single biggest element of an airline's cost base. So clearly, you know, this is something that airlines will be closely monitoring.
“And given what we have seen over the last couple of years, it is unlikely that most airlines will have significant hedging in place to protect them against this increase in the oil price. So I think this will be a factor certainly playing into fares as we go through the year if the oil price remains high,” Walsh noted recently.