Beyond the Tarmac
The oil price has been sliding on concerns of global economic slowdown hurting energy consumption, but the airline industry has little to cheer given elevated prices for jet fuel.
Rising energy prices will have an impact on the airline industry’s bottomline as fuel bill accounts for 20-30% of its operating costs.
Latest IATA data show the global industry would have to churn out $131.6bn on fuel costs in 2022. So far this year, jet fuel price averaged $142/barrel, the global body of airlines noted.
Fuel is a major cost component of operating an airline, which means a rise in energy costs will force airlines either to reduce costs elsewhere or increase fares.
“In the current operating environment neither is easy,” points out OAG, a UK-based global travel data provider.
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.
But given the global economic uncertainties, it is easier said than done.
“Because of oil price volatility, we cannot hedge anymore as banks are not ready to hedge. This is because they don’t know where the price is going – north or south,” Qatar Airways Group Chief Executive HE Akbar al-Baker said in Doha recently.
“That said, oil price is not in the hands of anyone – it is based on demand and supply and the political climate around the world,” he said.
Al-Baker also urged the oil industry to invest more in alternative fuel that will protect the environment.
“As I stated, I have no issue in paying a bit more, but I cannot pay four of five times the price of the normal Avgas (aviation gasoline), because it will not be affordable to us. And if we are pushed to do that… you as a passenger are going to pay for it.
“This is because airlines’ operate with very low margin. I don’t think there is any other industry in the world that operates with 4% or 5% margin.”
In 2021, Qatar Airways committed to using sustainable aviation fuel for at least 10% of combined fuel volumes by 2030, provided that a few suppliers produce more SAF.
Speaking on the sidelines of the 41st General Assembly of ICAO, IATA Director General Willie Walsh said: “I think everyone will be familiar with the rising oil price and the impact that energy prices will have on consumers. Starting at the beginning of this year, we saw what we call the crack spread, the difference between Brent (crude price) and the price of jet, widened very significantly.
“Although we have seen crude prices ease in recent months, we are still seeing elevated prices for jet fuel, and some of that is understandable, given that the demand reduced significantly in 2020 and 2021. So refining capacity moved away from jet. As that capacity came back online, we would have expected to see this crack spread narrow significantly.”
It is still at rates that are significantly elevated from historical rates, which you can see there going back to 2015. Between 2010 and 2019, the average spread was about 18%, so Brent averaged $80 a barrel throughout that 10-year period.
“We have seen that spreads go over 60%. At the end of September, it was at 56%. Now it has eased a little bit, but still a very big difference between crude prices and jet prices, which means that we will see costs continue to challenge the industry in 2022, and in 2023,” Walsh noted.
Gasoline prices have seen a sustained downtrend over the past three months. Gas prices fell for 13 consecutive weeks, a fresh record.
Meanwhile, the Airline Association of Southern Africa (AASA) warned that higher fuel costs and supply shortage may lead to flight disruptions and cancellations in the continent.
“The escalation of jet fuel rations throws into sharp focus South Africa’s vulnerability because of its reliance on imported jet fuel,” said AASA.
The group called on government and fuel suppliers to move with urgency and put in place a robust and resilient plan to ensure sufficient stocks of aviation fuel are always available.
Kirby Gordon, chief marketing officer at FlySafair, said that jet fuel has increased by around 220% over the last year and makes up about 50% of total operating costs – up from 30% previously.
“This is a huge deterrent for airlines to expand flights and operations, especially because they have to fly further between economic hubs in South Africa,” he said.