Hello, and welcome to Flight Global Focus, the essential
podcast for trusted aviation insights.
I'm Lewis Harper, Airlines Editor for Flight Global.
And this week, we are discussing rising jet fuel prices related
to the blockade of the Strait of Hormuz in the Middle East.
And we're looking at how global carriers are responding to the
crisis heading into the summer air travel season.
Joining me to talk about this is Howard Hardy, Flight Global's
America's Airlines editor. Hi, Howard.
Hi, Lewis. So, Howard, jet fuel costs are
rising quickly as a result of the US and Israel war on Iran.
Can you explain what's going on very broadly?
Yeah, I can. So this is difficult to talk
about with authority given how much everything changes
day-to-day or even hour to hour. Saying the conflict has been
volatile would be an understatement, right?
But at this moment, as we're recording, the US Navy has been
ordered by U.S. President Trump to block the
Strait preventing Iran accrued ships from getting through.
This blockade is now reportedly in effect, though there is still
some confusion surrounding how it works exactly.
Most of the shipping traffic through the Strait has been
effectively blocked by the threat of Iranian attack for
several weeks, but the situation is escalating now.
So this shipping lane through which more than 1/5 of the
world's traded oil flows on a daily basis, as well as a lot of
liquid natural gas, is now completely choked off.
This has lots of implications across the global economy.
Everyone has been hearing all about it lately.
The price of a barrel of crude oil has been up over $100
several different times. Now experts fear even higher
prices are possible, and as a result, the the cost of everyday
products at stores and at gas pumps are rising.
Those are maybe the most visible inflation markers.
The price of jet fuel is also rising.
That is because of what is called the crack spread.
That is the cost difference between crude products and
refined fossil products like jet fuel.
While the cost of a barrel of crude oil is rising, jet fuel is
rising faster. Airline executives are saying
that the crack spread is widening dramatically.
Jet fuel costs have roughly doubled since the beginning of
February, and as we all know, jet fuel is one of the top line
items in any airline's expense sheet.
Airlines are very sensitive to changes in jet fuel prices, so
this is a very big deal for them.
The situation with the closed straight and oil shipments
dropping off so dramatically, it amounts to a major shock for
carriers around the world. Some airlines are a little
better prepared to weather this type of event than others, but
there are none that you could say are totally immune from it.
Depending on how long the war in Iran drags out, we could see
major consequences for carriers. We're talking about trimming
capacity from the summer schedule, raising airfares, and
potentially even consolidation in the US airline market in
particular. But again, it is really
impossible to overstate how quickly the situation could
change this very moment. The Trump administration could
be reversing its stance, or Iran could lift its blockade in
response to the economic pressure.
So global carriers are all feeling the effects of this oil
choke point in the Middle East. What are some of the most
affected regions? I would point to the Asia
Pacific region. Asian countries are really the
primary customer for oil that tankers ship through the Strait.
We're hearing a lot about how the economies of the Philippines
and Thailand and Malaysia are bracing for strong impacts.
Many carriers in that region have already enacted flight
cancellations in response to the higher jet fuel prices.
Our colleague Alfred Chew, who is out at the moment, has done a
lot of great reporting on the subject.
Malaysian carrier AirAsia X is one example.
They have raised airfares about 40% and they've also trimmed
capacity from their network. Alfred also recently spoke to
the CEO of Malaysia Aviation Group, WHO talk about how
closely the company is following the Middle East crisis.
They're getting intelligence updates on the situation every
six hours and adjusting their plans accordingly.
So I think that really speaks to how fluid everything is right
now. But MAG says that they're not
going to make any big fleet strategy adjustments in
response, at least not yet. Cebu Pacific, they're based in
the the Philippines. They said last month that
they're well positioned to write out higher jet fuel prices.
They're anticipating jet fuel prices to double, which is
pretty significant considering that it is their most expensive
line item. They're passing on the cost to
customers through fare increases, but they say that
demand was tracking well at least through this month.
Elsewhere, we see that Qantas is scaling back capacity for the
second quarter. It is increasing fares in
response to the rising cost of jet fuel, but it is also still
seeing strong demand for international flights,
especially to Europe. And in response to all that, it
is shifting more flights away from the US and boosting its
European operations. Korean Air, for another example,
is in a particularly tough position where it is being hit
by higher jet fuel prices and devaluation of its currency
against the US dollar. So it is seeing a big slowdown
in domestic travel that carries us.
It is making cost cutting measures internally right now,
and I think we'd be remiss not to point out China, which is
actually the biggest customer for Middle East oil that flows
through the straight. This is surely an unwelcome
development for carriers like China Eastern Airlines and China
Southern Airlines. Both have been struggling to be
profitable since the COVID-19 pandemic.
There had been some optimism on that front lately.
Chinese carriers had had a strong third quarter last year,
so there was some thought that maybe they could turn it around
in the bigger picture. But fuel costs going through the
roof definitely are not helping their cause.
So what we're seeing really is that all across the Asia Pacific
region, carriers are in difficult spots and fuel costs
are putting major pressure on their profit margins.
Thanks, Howard. Yeah.
And just to talk a bit about the region I'm talking from, so
Europe, you know, similarly we're seeing impacts based on
pricing and potential shortages of jet fuel in the coming weeks
and months. And obviously we're we're just
heading into the the earnings season where we'll hear more
about that from the carriers themselves.
But as you mentioned how with you know jet fuel more than
double its pre war price, the reality is that a heavily hedged
carrier like Ryanair is I guess relatively well placed in the
region. But even in that case, you know,
we've heard Michael O'Leary who's group chief executive
there saying a couple of weeks ago that all airlines are
keeping a close eye on the supply side of things.
You know, there is the potential for shortages to force cuts to
schedules from May onwards. Obviously as with everything
we're talking about, much depends on on what happens in
terms of the ceasefire and the reopening of the straight.
But it that does remain a threat for all carriers in the region.
And and more broadly like Ryanair, British Airways and
Iberia, owner IAG is also reasonably well hedged in the
region. And it's also the case that for
both of them, you know, they they've seen high margins,
strong point financial performances recently and that
gives them a bit more wriggle room when it comes to absorbing
the impact of higher fuel costs whenever and to what extent that
occurs. Iegs pretty heavily exposed to
North Atlantic, which if Delta's recent comments are anything to
go by, is holding up reasonably well in terms of demand and the
acceptance of higher fares as a result of these higher fuel
costs. But you know, even in in that
case, if you look at British Airways rival version Atlantic,
for example, that carriers struggle to make a net profit
for some time, you know, and doesn't have that wriggle room
perhaps to to absorb the higher fuel costs in in in the same
way. So there's definite challenges
there. Even in markets that are
performing pretty strongly. That doesn't mean that you can
offset all those extra costs on that theme.
At the other end of the spectrum, you have carriers like
Whizz Air. So it was struggling going into
this crisis, you know, and alongside the shock of the the
much higher fuel prices, it is also taking a heavy hit from
having to suspend so many Middle Eastern services.
So you know, they've been profit warnings from Wasair and that's
a really significant impact there.
And you know, there are other smaller carriers in the region
that are vulnerable again, those that are already facing
challenges in the pre war environment, someone like Air
Baltic for example, which is not heavily hedged as you've
mentioned, Howard, you know, doubling your fuel price, which
is your your biggest cost line almost overnight is, is a huge
thing to absorb even at the best of times.
So real challenges there Going back to some of the bigger
carriers, obviously Air France KLM, it's relatively heavily
indebted in the region. So it's again a bit more
vulnerable to higher fuel cost, although it can be pretty nimble
with it's network. And you know in common with some
of it's peers, it is seeing some advantages from people choosing
it's carriers while the big Middle Eastern connectors cannot
operate their usual east to West route.
So that that is an upside for this crisis for some carriers.
We know Lufthansa Group, for example, has its challenges,
particularly with its German mainline operation.
And in the context of this discussion, it does not hedge
the crack spread. So the fact that jet fuel has
risen at a much higher rate than crude oil will have an impact on
its costs compared with peers perhaps.
But again, it's relatively high exposure to Asia is probably
working in its favour. So it's seen strong demand on
such services from people who might otherwise have flown with
the Middle Eastern connectors and that is boosting fares and
helping to offset those higher fuel costs to some extent.
And we'll find out more in the coming weeks.
EasyJet and I've obviously big carrier in Europe, it said
again, near term hedging is helping it quite a lot, but the
effects of higher fuel will become much more significant the
deeper into the year we go. And that I think that is a
sentiment shared with the vast majority of carriers.
And of course for everyone that you know, the fact is there is a
ceiling in terms of what consumers will absorb in terms
of paying higher fares to cover this higher fuel.
Broadly, I think the earnings seasons have got a big dull in
Europe in recent quarters, obviously in many cases for
positive reasons. You know, markets have been
relatively benign compared with what we've seen over the past
few years. But I think the upcoming season
is going to be anything but dull.
I think we all European carriers will be desperate for the period
of high fuel cost to end as swiftly as it began.
But I think from most reports that does seem unlikely.
Yeah, that does seem unlikely. Agreed, and along the same line,
Delta Airlines has gotten a bit boring in that it is just this
juggernaut that just keeps on dominating the US market.
But it had kicked off earnings season for the first quarter by
saying that it had recorded its first quarterly loss in about 3
years, largely due to jet fuel prices rising so dramatically
toward the end of the first quarter.
There are other factors at play there, including bad winter
weather that hit US carriers so hard, but that was a really
striking moment to see such a strong financial performer
feeling the pinch, too. And looking at the second
quarter, Delta expects fuel costs to rise year on year by
about 2 billion. Demand is still up for the
spring and summer, they say, so Delta is still expecting to be
profitable in the second quarter.
What is notable about Delta's situation in particular is that
they have their own jet fuel refinery.
They have a subsidiary called Monroe Energy in the
Philadelphia area. This is extremely rare for an
airline to have this sort of internal fuel production system
in place, and that insulates them a bit from this big
geopolitical shock. Their CFO says that the refinery
will provide about a $300 million boost during the second
quarter alone. So it looks like that has been
paying off for them. Looking on the West Coast, I
think Alaska Air Group is one of the more interesting companies
to watch. Even in normal times, they have
the highest fuel costs of any US carrier.
That's because of their geographic location, with their
primary bases being in Seattle, Portland, San Francisco and San
Diego. The cost of refining or
obtaining jet fuel are higher on the West Coast, particularly in
California. But on the other hand, they're
also recognised as a strong financial performer.
So they run a really tight operation and I think how they
perform through this period will be very telling.
At the end of March, Alaska Air said that its refining margins
had risen enormously, up to 400% in some cases.
So that's really striking. And we haven't even touched on
Latin America yet. This is an interesting region as
well because Brazil does have some in house refining
capability and there is some talk that the Middle East oil
blockade could actually be a positive catalyst for their
industry in some ways. Like this will be a sort of a
chance for them to step up perhaps.
But then other countries like Colombia, they do not have
refining capabilities and they are prone to regional jet fuel
shortages even in good times. I had an off the record
conversation with ACFO at a Latin American airline group
last month. He was saying the full effects
probably wouldn't be felt until likely May.
And historically, most airlines in the region have not had
strong enough balance sheets to participate in hedging
strategies, which you mentioned before.
That's where you pay for fuel in advance to lock in prices at a
certain level that requires credit and strong financial
standing in general. But this particular group had
taken out some hedges about a week before the bombing started,
and they were counting themselves as lucky.
Looking at the big, you know, the big airline group in the
region, LATAM, they will probably be able to pass costs
on to their consumers more effectively than other carriers
in the region. They have the upmarket advantage
that others do not. They get the bulk of the
international business class Flyers that are flying out of
Brazil and other countries in South America.
So even a 15 or 20% increase in airfares could probably be
absorbed by their customers. But the rest of the region's
market is really price sensitive, and this could have a
really big effect on demand. During a time when Latin America
has really been a bright spot globally for the airline sector,
a lot of those carriers have felt ascendant.
And maybe the timing of this fuel crisis could sort of stall
out that progress. And drilling down a little more
specifically, I think it would be really interesting to monitor
Azul's situation moving forward. They just emerged from Chapter
11 bankruptcy. They're in a much better
financial situation than before, but they still don't have a lot
of liquid cash on hand, so the fuel crisis could put them in a
bind specifically. Thanks, Howard.
And and you mentioned previously that the rising fuel costs could
encourage airline consolidation. Could you explain that a little
further? Yeah.
On Delta's first quarter earnings call, CEO Ed Bastian
opined on how higher fuel costs might affect the airline
industry in the broadest terms. You know, he's been around for
quite a while. He's been watching for for
decades at this point. He says this is a cyclical
thing, and every time fuel prices rise, weaker airlines are
forced out of the market, He says that is often through
consolidation. So he was basically joining the
chorus of voices in the industry, in the industry who
are saying that fuel costs could create the conditions for
acquisitions. There's been a lot of
combination talk lately. For example, JetBlue is in a
difficult position financially, and it could be considering some
of those options. United and Southwest and Alaska
Air have been kicked around as possibilities.
It seems likely this is just speculation on my part.
I don't have any particular insight into this, but it seems
likely that Spirit Airlines will be forced into the arms of a
competitor like Frontier Airlines.
That combination has been talked about a tonne over the past
several years. Maybe with Spirit attempting to
exit from Chapter 11 bankruptcy in the next few months, they
could be more amenable to a tie up with Frontier given the
rising cost of jet fuel. And of course, the big audacious
idea that is out there right now is a merger between United and
American Airlines. It sounds crazy to say out loud,
and I'm not even sure I should utter those words, but there are
reports floating around right now that United CEO Scott Kirby
has advanced that idea to US lawmakers and regulators.
The Trump administration, notably, is open to big business
deals like this, but it is super unclear whether even this
administration would get behind two of the very biggest airlines
in the world becoming one company and everything that
would entail from a monopoly standpoint.
So this is all to say that big moves are more likely when
airlines margins are under intense pressure like they are
now. So this is something to watch
moving forward and will likely account for some of the biggest
airline stories through the rest of this year.
Yeah, definitely. And I think, yeah, similarly, I
can think of a few airlines in Europe which we could probably
talk about in the same context. Thanks for your insight, Howard.
Thank you. Nice talking with you, Lewis.
You've been listening to Flight Global Focus, which is a
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I'm Lewis Harper, and we'll see you next time for Flight Global
Focus.