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Airlines under pressure to pass on costs as fuel prices surge

The rising price of fuel threatens the recovery of the aviation industry just as passengers return to the skies.

Because gross prices remain high, airline executives face a critical calculation: how much of their fuel bill can they transfer to customers without leaving their planes empty?

The heads of Europe’s major airlines met this week for the first time in two years at a conference in Brussels, each of which reported a burst of demand as epidemic-related travel restrictions were lifted.

Lufthansa CEO Carsten Spoor said his airline will fly more short-haul routes in the summer than in 2019, while the owner of British Airways IAG plans to return to pre-epidemic transatlantic flight levels by the summer.

At the head of the group, Ryanair expects to fly 165 million passengers in this fiscal year, which began in April, an increase of 150 million before the plague.

“There’s a huge demand for summer, there’s just no doubt about it,” said EasyJet CEO Johan Lundgren.

But the price of fuel – which could be up to a third of an airline’s costs – threatens the profitability of this rapid recovery.

Jet fuel has risen by a third to more than $ 150 a barrel since Russia’s invasion of Ukraine stormed commodity markets. The rise to 14-year highs even surpassed Brent crude oil, as airlines had to pay a premium for the refined product.

U.S. airlines have already indicated that they will pass on fuel costs to consumers, even though the demand for passengers is strong enough to meet that. Delta, for example, said it needs to pay back between $ 15 and $ 20 each way for an average ticket value of about $ 200 to offset higher fuel costs.

Some airlines have introduced fuel levies, which are treated like government taxes that micromanage new tickets and appear as additional charges when redeeming air miles. Air France and KLM said long-haul flights would become more expensive. A KLM flight back from Amsterdam to New York will cost 40 euros in economy class and 100 euros in business.

Spohr from Lufthansa was unequivocal that airlines need to “make sure our business model still works” in an environment that also included higher costs of airport and staff. “Inflation is ultimately hurting every industry,” he said.

Cheap airlines are particularly vulnerable because fuel costs are higher than total ticket prices than their full-service competitors, which charge more for seats.

Because higher inflation, including soaring energy costs, is hurting European consumers, passengers looking for cheaper flights are likely to be more sensitive to cost, making it difficult to raise prices without hurting demand.

EasyJet’s Lundgren said airlines would “necessarily” have to bear some of the costs themselves, but added a deep cost cut forced on the aviation industry by the epidemic would help soften the blow.

“We always have to make sure we can offer really, really attractive fares to passengers. And the pricing is super-dynamic,” he said.

Demand for this summer’s travel was strong, but outside of those peak periods customers still needed temptations, said Ryanair boss Michael O’Leary.

“I am sad to report that at the moment in Ryanair, ticket prices are falling in April and May, they are softer than in 2019,” he said. “We are still trying to get the invitations back for the summer.”

Ryanair is more protected than most of them, and fencing off 80 percent of the fuel it expects to need this year at about $ 65 a barrel, a “case” decision that will help the company return to profits, Olivier said.

The low-cost Wizz Air competitor, whose shares have fallen nearly 40 percent this year, was not fenced off when the war in Ukraine began, but reversed its path and bought defense in March after the spot price had already skyrocketed.

Asked if the oil spike could turn out to be a surprising competitive advantage for Ryanair, O’Leary said its airline’s growth is limited by the number of new shipments arriving from Boeing.

But he expected it to bring its “cost advantage” when the industry recovers.

The head of AirBaltic, Martin Gauss, said airlines could not think only in terms of “transferring” costs directly to consumers without taking into account prices at other airlines.

“The market basically decides on the ticket price.

Robert Boyle, a former consultant and head of strategy at IAG, said Ryanair could take advantage of its hedging position and strong balance sheet to keep ticket prices low and squeeze out its competitors.

“Ryanair’s factor will make it harder for other airlines to raise prices without seeing a big hurt in demand,” he said. “If they do it anyway and just cut more capacity to absorb the volume loss, they will leave even more market share to Ryanair. It’s going to be some tough months.”

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Airlines under pressure to pass on costs as fuel prices surge Source link Airlines under pressure to pass on costs as fuel prices surge

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