1 00:00:07,920 --> 00:00:10,960 Hello, and welcome to Flight Global Focus, the essential 2 00:00:10,960 --> 00:00:13,600 podcast for trusted aviation insights. 3 00:00:14,240 --> 00:00:16,960 I'm Lewis Harper, Airlines Editor for Flight Global. 4 00:00:17,400 --> 00:00:20,600 And this week, we are discussing rising jet fuel prices related 5 00:00:20,600 --> 00:00:23,560 to the blockade of the Strait of Hormuz in the Middle East. 6 00:00:24,040 --> 00:00:26,480 And we're looking at how global carriers are responding to the 7 00:00:26,480 --> 00:00:29,160 crisis heading into the summer air travel season. 8 00:00:29,920 --> 00:00:32,920 Joining me to talk about this is Howard Hardy, Flight Global's 9 00:00:33,000 --> 00:00:35,360 America's Airlines editor. Hi, Howard. 10 00:00:35,760 --> 00:00:43,520 Hi, Lewis. So, Howard, jet fuel costs are 11 00:00:43,520 --> 00:00:47,800 rising quickly as a result of the US and Israel war on Iran. 12 00:00:48,000 --> 00:00:50,280 Can you explain what's going on very broadly? 13 00:00:50,640 --> 00:00:53,480 Yeah, I can. So this is difficult to talk 14 00:00:53,480 --> 00:00:56,360 about with authority given how much everything changes 15 00:00:56,360 --> 00:01:00,640 day-to-day or even hour to hour. Saying the conflict has been 16 00:01:00,640 --> 00:01:02,600 volatile would be an understatement, right? 17 00:01:02,600 --> 00:01:07,760 But at this moment, as we're recording, the US Navy has been 18 00:01:07,760 --> 00:01:11,280 ordered by U.S. President Trump to block the 19 00:01:11,280 --> 00:01:15,480 Strait preventing Iran accrued ships from getting through. 20 00:01:15,880 --> 00:01:19,720 This blockade is now reportedly in effect, though there is still 21 00:01:19,720 --> 00:01:22,200 some confusion surrounding how it works exactly. 22 00:01:22,800 --> 00:01:25,080 Most of the shipping traffic through the Strait has been 23 00:01:25,080 --> 00:01:28,280 effectively blocked by the threat of Iranian attack for 24 00:01:28,280 --> 00:01:32,200 several weeks, but the situation is escalating now. 25 00:01:32,680 --> 00:01:36,080 So this shipping lane through which more than 1/5 of the 26 00:01:36,080 --> 00:01:41,160 world's traded oil flows on a daily basis, as well as a lot of 27 00:01:41,160 --> 00:01:44,160 liquid natural gas, is now completely choked off. 28 00:01:44,960 --> 00:01:47,760 This has lots of implications across the global economy. 29 00:01:47,760 --> 00:01:49,840 Everyone has been hearing all about it lately. 30 00:01:49,920 --> 00:01:54,520 The price of a barrel of crude oil has been up over $100 31 00:01:54,520 --> 00:01:58,160 several different times. Now experts fear even higher 32 00:01:58,160 --> 00:02:02,760 prices are possible, and as a result, the the cost of everyday 33 00:02:02,760 --> 00:02:06,600 products at stores and at gas pumps are rising. 34 00:02:07,000 --> 00:02:10,199 Those are maybe the most visible inflation markers. 35 00:02:11,039 --> 00:02:13,640 The price of jet fuel is also rising. 36 00:02:14,160 --> 00:02:16,320 That is because of what is called the crack spread. 37 00:02:16,560 --> 00:02:19,320 That is the cost difference between crude products and 38 00:02:19,320 --> 00:02:21,800 refined fossil products like jet fuel. 39 00:02:22,560 --> 00:02:26,960 While the cost of a barrel of crude oil is rising, jet fuel is 40 00:02:26,960 --> 00:02:29,880 rising faster. Airline executives are saying 41 00:02:29,880 --> 00:02:32,600 that the crack spread is widening dramatically. 42 00:02:32,760 --> 00:02:35,280 Jet fuel costs have roughly doubled since the beginning of 43 00:02:35,280 --> 00:02:39,440 February, and as we all know, jet fuel is one of the top line 44 00:02:39,440 --> 00:02:42,080 items in any airline's expense sheet. 45 00:02:42,880 --> 00:02:46,840 Airlines are very sensitive to changes in jet fuel prices, so 46 00:02:46,840 --> 00:02:48,400 this is a very big deal for them. 47 00:02:48,920 --> 00:02:51,280 The situation with the closed straight and oil shipments 48 00:02:51,280 --> 00:02:54,880 dropping off so dramatically, it amounts to a major shock for 49 00:02:54,880 --> 00:02:57,240 carriers around the world. Some airlines are a little 50 00:02:57,240 --> 00:03:01,560 better prepared to weather this type of event than others, but 51 00:03:01,560 --> 00:03:04,040 there are none that you could say are totally immune from it. 52 00:03:04,680 --> 00:03:07,840 Depending on how long the war in Iran drags out, we could see 53 00:03:07,840 --> 00:03:11,680 major consequences for carriers. We're talking about trimming 54 00:03:11,680 --> 00:03:16,080 capacity from the summer schedule, raising airfares, and 55 00:03:16,080 --> 00:03:20,240 potentially even consolidation in the US airline market in 56 00:03:20,240 --> 00:03:23,000 particular. But again, it is really 57 00:03:23,000 --> 00:03:25,600 impossible to overstate how quickly the situation could 58 00:03:25,600 --> 00:03:28,200 change this very moment. The Trump administration could 59 00:03:28,200 --> 00:03:32,320 be reversing its stance, or Iran could lift its blockade in 60 00:03:32,320 --> 00:03:34,080 response to the economic pressure. 61 00:03:34,360 --> 00:03:37,480 So global carriers are all feeling the effects of this oil 62 00:03:37,480 --> 00:03:40,400 choke point in the Middle East. What are some of the most 63 00:03:40,400 --> 00:03:43,800 affected regions? I would point to the Asia 64 00:03:43,800 --> 00:03:46,280 Pacific region. Asian countries are really the 65 00:03:46,280 --> 00:03:50,160 primary customer for oil that tankers ship through the Strait. 66 00:03:50,640 --> 00:03:54,400 We're hearing a lot about how the economies of the Philippines 67 00:03:54,400 --> 00:03:58,280 and Thailand and Malaysia are bracing for strong impacts. 68 00:03:58,440 --> 00:04:01,080 Many carriers in that region have already enacted flight 69 00:04:01,080 --> 00:04:04,560 cancellations in response to the higher jet fuel prices. 70 00:04:05,080 --> 00:04:08,480 Our colleague Alfred Chew, who is out at the moment, has done a 71 00:04:08,480 --> 00:04:10,360 lot of great reporting on the subject. 72 00:04:11,080 --> 00:04:14,720 Malaysian carrier AirAsia X is one example. 73 00:04:14,760 --> 00:04:18,640 They have raised airfares about 40% and they've also trimmed 74 00:04:18,640 --> 00:04:22,560 capacity from their network. Alfred also recently spoke to 75 00:04:22,560 --> 00:04:27,400 the CEO of Malaysia Aviation Group, WHO talk about how 76 00:04:27,400 --> 00:04:30,080 closely the company is following the Middle East crisis. 77 00:04:30,080 --> 00:04:33,160 They're getting intelligence updates on the situation every 78 00:04:33,160 --> 00:04:35,920 six hours and adjusting their plans accordingly. 79 00:04:35,920 --> 00:04:39,080 So I think that really speaks to how fluid everything is right 80 00:04:39,080 --> 00:04:41,920 now. But MAG says that they're not 81 00:04:41,920 --> 00:04:44,840 going to make any big fleet strategy adjustments in 82 00:04:44,840 --> 00:04:48,680 response, at least not yet. Cebu Pacific, they're based in 83 00:04:48,680 --> 00:04:52,040 the the Philippines. They said last month that 84 00:04:52,040 --> 00:04:55,240 they're well positioned to write out higher jet fuel prices. 85 00:04:55,680 --> 00:04:58,640 They're anticipating jet fuel prices to double, which is 86 00:04:58,640 --> 00:05:01,520 pretty significant considering that it is their most expensive 87 00:05:01,520 --> 00:05:04,400 line item. They're passing on the cost to 88 00:05:04,400 --> 00:05:07,320 customers through fare increases, but they say that 89 00:05:07,320 --> 00:05:10,880 demand was tracking well at least through this month. 90 00:05:11,800 --> 00:05:15,480 Elsewhere, we see that Qantas is scaling back capacity for the 91 00:05:15,480 --> 00:05:18,400 second quarter. It is increasing fares in 92 00:05:18,400 --> 00:05:22,720 response to the rising cost of jet fuel, but it is also still 93 00:05:22,720 --> 00:05:24,960 seeing strong demand for international flights, 94 00:05:25,160 --> 00:05:28,640 especially to Europe. And in response to all that, it 95 00:05:28,640 --> 00:05:31,760 is shifting more flights away from the US and boosting its 96 00:05:31,760 --> 00:05:36,320 European operations. Korean Air, for another example, 97 00:05:36,320 --> 00:05:40,320 is in a particularly tough position where it is being hit 98 00:05:40,320 --> 00:05:44,120 by higher jet fuel prices and devaluation of its currency 99 00:05:44,120 --> 00:05:47,320 against the US dollar. So it is seeing a big slowdown 100 00:05:47,320 --> 00:05:49,840 in domestic travel that carries us. 101 00:05:49,840 --> 00:05:52,600 It is making cost cutting measures internally right now, 102 00:05:53,640 --> 00:05:58,440 and I think we'd be remiss not to point out China, which is 103 00:05:58,440 --> 00:06:01,520 actually the biggest customer for Middle East oil that flows 104 00:06:01,520 --> 00:06:04,120 through the straight. This is surely an unwelcome 105 00:06:04,120 --> 00:06:08,600 development for carriers like China Eastern Airlines and China 106 00:06:08,600 --> 00:06:12,160 Southern Airlines. Both have been struggling to be 107 00:06:12,160 --> 00:06:14,880 profitable since the COVID-19 pandemic. 108 00:06:15,440 --> 00:06:18,240 There had been some optimism on that front lately. 109 00:06:18,880 --> 00:06:22,800 Chinese carriers had had a strong third quarter last year, 110 00:06:22,800 --> 00:06:25,680 so there was some thought that maybe they could turn it around 111 00:06:25,720 --> 00:06:29,000 in the bigger picture. But fuel costs going through the 112 00:06:29,000 --> 00:06:30,840 roof definitely are not helping their cause. 113 00:06:31,520 --> 00:06:35,200 So what we're seeing really is that all across the Asia Pacific 114 00:06:35,200 --> 00:06:39,080 region, carriers are in difficult spots and fuel costs 115 00:06:39,080 --> 00:06:41,760 are putting major pressure on their profit margins. 116 00:06:42,120 --> 00:06:42,720 Thanks, Howard. Yeah. 117 00:06:42,720 --> 00:06:45,680 And just to talk a bit about the region I'm talking from, so 118 00:06:45,680 --> 00:06:49,280 Europe, you know, similarly we're seeing impacts based on 119 00:06:49,280 --> 00:06:54,240 pricing and potential shortages of jet fuel in the coming weeks 120 00:06:54,360 --> 00:06:57,000 and months. And obviously we're we're just 121 00:06:57,000 --> 00:06:59,920 heading into the the earnings season where we'll hear more 122 00:06:59,920 --> 00:07:02,520 about that from the carriers themselves. 123 00:07:02,800 --> 00:07:05,120 But as you mentioned how with you know jet fuel more than 124 00:07:05,120 --> 00:07:09,440 double its pre war price, the reality is that a heavily hedged 125 00:07:09,440 --> 00:07:13,240 carrier like Ryanair is I guess relatively well placed in the 126 00:07:13,240 --> 00:07:15,600 region. But even in that case, you know, 127 00:07:15,600 --> 00:07:18,200 we've heard Michael O'Leary who's group chief executive 128 00:07:18,200 --> 00:07:21,600 there saying a couple of weeks ago that all airlines are 129 00:07:21,600 --> 00:07:24,200 keeping a close eye on the supply side of things. 130 00:07:24,200 --> 00:07:28,560 You know, there is the potential for shortages to force cuts to 131 00:07:28,560 --> 00:07:32,240 schedules from May onwards. Obviously as with everything 132 00:07:32,240 --> 00:07:35,240 we're talking about, much depends on on what happens in 133 00:07:35,240 --> 00:07:37,920 terms of the ceasefire and the reopening of the straight. 134 00:07:37,920 --> 00:07:41,200 But it that does remain a threat for all carriers in the region. 135 00:07:41,200 --> 00:07:44,720 And and more broadly like Ryanair, British Airways and 136 00:07:44,720 --> 00:07:48,520 Iberia, owner IAG is also reasonably well hedged in the 137 00:07:48,520 --> 00:07:50,840 region. And it's also the case that for 138 00:07:50,840 --> 00:07:53,800 both of them, you know, they they've seen high margins, 139 00:07:53,800 --> 00:07:56,640 strong point financial performances recently and that 140 00:07:56,640 --> 00:07:59,600 gives them a bit more wriggle room when it comes to absorbing 141 00:07:59,600 --> 00:08:04,080 the impact of higher fuel costs whenever and to what extent that 142 00:08:04,080 --> 00:08:06,760 occurs. Iegs pretty heavily exposed to 143 00:08:06,760 --> 00:08:10,000 North Atlantic, which if Delta's recent comments are anything to 144 00:08:10,000 --> 00:08:14,000 go by, is holding up reasonably well in terms of demand and the 145 00:08:14,000 --> 00:08:17,440 acceptance of higher fares as a result of these higher fuel 146 00:08:17,440 --> 00:08:19,880 costs. But you know, even in in that 147 00:08:19,880 --> 00:08:23,760 case, if you look at British Airways rival version Atlantic, 148 00:08:23,760 --> 00:08:27,040 for example, that carriers struggle to make a net profit 149 00:08:27,040 --> 00:08:29,800 for some time, you know, and doesn't have that wriggle room 150 00:08:29,800 --> 00:08:33,480 perhaps to to absorb the higher fuel costs in in in the same 151 00:08:33,480 --> 00:08:34,919 way. So there's definite challenges 152 00:08:34,919 --> 00:08:36,320 there. Even in markets that are 153 00:08:36,720 --> 00:08:39,080 performing pretty strongly. That doesn't mean that you can 154 00:08:39,080 --> 00:08:41,760 offset all those extra costs on that theme. 155 00:08:41,760 --> 00:08:43,919 At the other end of the spectrum, you have carriers like 156 00:08:43,919 --> 00:08:46,400 Whizz Air. So it was struggling going into 157 00:08:46,400 --> 00:08:50,000 this crisis, you know, and alongside the shock of the the 158 00:08:50,000 --> 00:08:54,040 much higher fuel prices, it is also taking a heavy hit from 159 00:08:54,040 --> 00:08:56,680 having to suspend so many Middle Eastern services. 160 00:08:57,120 --> 00:09:00,680 So you know, they've been profit warnings from Wasair and that's 161 00:09:00,760 --> 00:09:02,400 a really significant impact there. 162 00:09:02,840 --> 00:09:05,600 And you know, there are other smaller carriers in the region 163 00:09:05,600 --> 00:09:08,640 that are vulnerable again, those that are already facing 164 00:09:08,640 --> 00:09:11,240 challenges in the pre war environment, someone like Air 165 00:09:11,240 --> 00:09:14,760 Baltic for example, which is not heavily hedged as you've 166 00:09:14,760 --> 00:09:17,520 mentioned, Howard, you know, doubling your fuel price, which 167 00:09:17,520 --> 00:09:21,840 is your your biggest cost line almost overnight is, is a huge 168 00:09:21,840 --> 00:09:24,360 thing to absorb even at the best of times. 169 00:09:24,360 --> 00:09:28,160 So real challenges there Going back to some of the bigger 170 00:09:28,160 --> 00:09:31,760 carriers, obviously Air France KLM, it's relatively heavily 171 00:09:31,760 --> 00:09:34,600 indebted in the region. So it's again a bit more 172 00:09:34,600 --> 00:09:37,920 vulnerable to higher fuel cost, although it can be pretty nimble 173 00:09:37,920 --> 00:09:40,720 with it's network. And you know in common with some 174 00:09:40,720 --> 00:09:44,160 of it's peers, it is seeing some advantages from people choosing 175 00:09:44,480 --> 00:09:47,160 it's carriers while the big Middle Eastern connectors cannot 176 00:09:47,160 --> 00:09:49,000 operate their usual east to West route. 177 00:09:49,000 --> 00:09:52,800 So that that is an upside for this crisis for some carriers. 178 00:09:53,240 --> 00:09:55,680 We know Lufthansa Group, for example, has its challenges, 179 00:09:55,680 --> 00:09:58,040 particularly with its German mainline operation. 180 00:09:58,760 --> 00:10:01,680 And in the context of this discussion, it does not hedge 181 00:10:01,840 --> 00:10:04,680 the crack spread. So the fact that jet fuel has 182 00:10:04,680 --> 00:10:08,600 risen at a much higher rate than crude oil will have an impact on 183 00:10:08,600 --> 00:10:10,960 its costs compared with peers perhaps. 184 00:10:11,280 --> 00:10:15,800 But again, it's relatively high exposure to Asia is probably 185 00:10:15,800 --> 00:10:18,840 working in its favour. So it's seen strong demand on 186 00:10:18,840 --> 00:10:21,760 such services from people who might otherwise have flown with 187 00:10:21,760 --> 00:10:25,120 the Middle Eastern connectors and that is boosting fares and 188 00:10:25,120 --> 00:10:28,480 helping to offset those higher fuel costs to some extent. 189 00:10:28,720 --> 00:10:30,800 And we'll find out more in the coming weeks. 190 00:10:31,320 --> 00:10:34,640 EasyJet and I've obviously big carrier in Europe, it said 191 00:10:34,640 --> 00:10:37,920 again, near term hedging is helping it quite a lot, but the 192 00:10:37,920 --> 00:10:40,720 effects of higher fuel will become much more significant the 193 00:10:40,720 --> 00:10:43,880 deeper into the year we go. And that I think that is a 194 00:10:43,880 --> 00:10:46,600 sentiment shared with the vast majority of carriers. 195 00:10:47,680 --> 00:10:50,640 And of course for everyone that you know, the fact is there is a 196 00:10:50,640 --> 00:10:53,880 ceiling in terms of what consumers will absorb in terms 197 00:10:53,880 --> 00:10:57,200 of paying higher fares to cover this higher fuel. 198 00:10:57,880 --> 00:11:00,880 Broadly, I think the earnings seasons have got a big dull in 199 00:11:00,880 --> 00:11:04,440 Europe in recent quarters, obviously in many cases for 200 00:11:04,440 --> 00:11:07,000 positive reasons. You know, markets have been 201 00:11:07,360 --> 00:11:09,840 relatively benign compared with what we've seen over the past 202 00:11:09,840 --> 00:11:12,640 few years. But I think the upcoming season 203 00:11:12,640 --> 00:11:14,360 is going to be anything but dull. 204 00:11:14,360 --> 00:11:18,600 I think we all European carriers will be desperate for the period 205 00:11:18,600 --> 00:11:21,680 of high fuel cost to end as swiftly as it began. 206 00:11:21,680 --> 00:11:25,000 But I think from most reports that does seem unlikely. 207 00:11:25,280 --> 00:11:29,480 Yeah, that does seem unlikely. Agreed, and along the same line, 208 00:11:29,480 --> 00:11:32,920 Delta Airlines has gotten a bit boring in that it is just this 209 00:11:32,920 --> 00:11:36,600 juggernaut that just keeps on dominating the US market. 210 00:11:36,800 --> 00:11:40,120 But it had kicked off earnings season for the first quarter by 211 00:11:40,120 --> 00:11:44,640 saying that it had recorded its first quarterly loss in about 3 212 00:11:44,640 --> 00:11:49,440 years, largely due to jet fuel prices rising so dramatically 213 00:11:49,440 --> 00:11:50,880 toward the end of the first quarter. 214 00:11:51,280 --> 00:11:54,440 There are other factors at play there, including bad winter 215 00:11:54,440 --> 00:11:58,360 weather that hit US carriers so hard, but that was a really 216 00:11:58,360 --> 00:12:02,240 striking moment to see such a strong financial performer 217 00:12:02,240 --> 00:12:06,200 feeling the pinch, too. And looking at the second 218 00:12:06,200 --> 00:12:10,240 quarter, Delta expects fuel costs to rise year on year by 219 00:12:10,320 --> 00:12:13,480 about 2 billion. Demand is still up for the 220 00:12:13,480 --> 00:12:17,280 spring and summer, they say, so Delta is still expecting to be 221 00:12:17,280 --> 00:12:19,160 profitable in the second quarter. 222 00:12:20,240 --> 00:12:24,640 What is notable about Delta's situation in particular is that 223 00:12:24,640 --> 00:12:26,960 they have their own jet fuel refinery. 224 00:12:27,000 --> 00:12:30,840 They have a subsidiary called Monroe Energy in the 225 00:12:30,840 --> 00:12:34,000 Philadelphia area. This is extremely rare for an 226 00:12:34,000 --> 00:12:37,160 airline to have this sort of internal fuel production system 227 00:12:37,160 --> 00:12:41,000 in place, and that insulates them a bit from this big 228 00:12:41,000 --> 00:12:45,040 geopolitical shock. Their CFO says that the refinery 229 00:12:45,360 --> 00:12:49,440 will provide about a $300 million boost during the second 230 00:12:49,440 --> 00:12:51,720 quarter alone. So it looks like that has been 231 00:12:51,720 --> 00:12:55,520 paying off for them. Looking on the West Coast, I 232 00:12:55,520 --> 00:12:58,400 think Alaska Air Group is one of the more interesting companies 233 00:12:58,400 --> 00:13:01,400 to watch. Even in normal times, they have 234 00:13:01,400 --> 00:13:04,080 the highest fuel costs of any US carrier. 235 00:13:04,440 --> 00:13:07,720 That's because of their geographic location, with their 236 00:13:07,720 --> 00:13:11,600 primary bases being in Seattle, Portland, San Francisco and San 237 00:13:11,600 --> 00:13:14,080 Diego. The cost of refining or 238 00:13:14,080 --> 00:13:18,560 obtaining jet fuel are higher on the West Coast, particularly in 239 00:13:18,720 --> 00:13:21,160 California. But on the other hand, they're 240 00:13:21,160 --> 00:13:24,560 also recognised as a strong financial performer. 241 00:13:24,560 --> 00:13:28,200 So they run a really tight operation and I think how they 242 00:13:28,200 --> 00:13:30,800 perform through this period will be very telling. 243 00:13:31,440 --> 00:13:35,640 At the end of March, Alaska Air said that its refining margins 244 00:13:35,640 --> 00:13:39,720 had risen enormously, up to 400% in some cases. 245 00:13:40,680 --> 00:13:43,840 So that's really striking. And we haven't even touched on 246 00:13:43,840 --> 00:13:47,680 Latin America yet. This is an interesting region as 247 00:13:47,680 --> 00:13:52,800 well because Brazil does have some in house refining 248 00:13:52,800 --> 00:13:56,520 capability and there is some talk that the Middle East oil 249 00:13:56,520 --> 00:13:59,320 blockade could actually be a positive catalyst for their 250 00:13:59,320 --> 00:14:01,760 industry in some ways. Like this will be a sort of a 251 00:14:01,760 --> 00:14:03,720 chance for them to step up perhaps. 252 00:14:04,160 --> 00:14:08,080 But then other countries like Colombia, they do not have 253 00:14:08,080 --> 00:14:11,840 refining capabilities and they are prone to regional jet fuel 254 00:14:11,840 --> 00:14:16,800 shortages even in good times. I had an off the record 255 00:14:16,800 --> 00:14:20,400 conversation with ACFO at a Latin American airline group 256 00:14:20,400 --> 00:14:23,320 last month. He was saying the full effects 257 00:14:23,720 --> 00:14:27,560 probably wouldn't be felt until likely May. 258 00:14:28,240 --> 00:14:32,760 And historically, most airlines in the region have not had 259 00:14:32,800 --> 00:14:36,280 strong enough balance sheets to participate in hedging 260 00:14:36,280 --> 00:14:38,080 strategies, which you mentioned before. 261 00:14:38,320 --> 00:14:41,520 That's where you pay for fuel in advance to lock in prices at a 262 00:14:41,520 --> 00:14:45,480 certain level that requires credit and strong financial 263 00:14:45,480 --> 00:14:48,600 standing in general. But this particular group had 264 00:14:48,600 --> 00:14:51,920 taken out some hedges about a week before the bombing started, 265 00:14:52,280 --> 00:14:55,080 and they were counting themselves as lucky. 266 00:14:56,040 --> 00:14:58,360 Looking at the big, you know, the big airline group in the 267 00:14:58,360 --> 00:15:03,320 region, LATAM, they will probably be able to pass costs 268 00:15:03,320 --> 00:15:06,840 on to their consumers more effectively than other carriers 269 00:15:06,840 --> 00:15:10,480 in the region. They have the upmarket advantage 270 00:15:10,480 --> 00:15:12,920 that others do not. They get the bulk of the 271 00:15:13,480 --> 00:15:16,320 international business class Flyers that are flying out of 272 00:15:16,320 --> 00:15:19,120 Brazil and other countries in South America. 273 00:15:19,520 --> 00:15:24,360 So even a 15 or 20% increase in airfares could probably be 274 00:15:24,360 --> 00:15:27,920 absorbed by their customers. But the rest of the region's 275 00:15:27,920 --> 00:15:31,960 market is really price sensitive, and this could have a 276 00:15:31,960 --> 00:15:35,840 really big effect on demand. During a time when Latin America 277 00:15:35,840 --> 00:15:39,040 has really been a bright spot globally for the airline sector, 278 00:15:39,440 --> 00:15:41,680 a lot of those carriers have felt ascendant. 279 00:15:42,320 --> 00:15:46,120 And maybe the timing of this fuel crisis could sort of stall 280 00:15:46,120 --> 00:15:49,720 out that progress. And drilling down a little more 281 00:15:49,720 --> 00:15:53,040 specifically, I think it would be really interesting to monitor 282 00:15:53,320 --> 00:15:57,400 Azul's situation moving forward. They just emerged from Chapter 283 00:15:57,400 --> 00:16:00,560 11 bankruptcy. They're in a much better 284 00:16:00,560 --> 00:16:04,160 financial situation than before, but they still don't have a lot 285 00:16:04,160 --> 00:16:08,680 of liquid cash on hand, so the fuel crisis could put them in a 286 00:16:08,680 --> 00:16:10,720 bind specifically. Thanks, Howard. 287 00:16:10,720 --> 00:16:14,080 And and you mentioned previously that the rising fuel costs could 288 00:16:14,080 --> 00:16:17,240 encourage airline consolidation. Could you explain that a little 289 00:16:17,240 --> 00:16:18,440 further? Yeah. 290 00:16:18,440 --> 00:16:23,360 On Delta's first quarter earnings call, CEO Ed Bastian 291 00:16:23,360 --> 00:16:27,440 opined on how higher fuel costs might affect the airline 292 00:16:27,440 --> 00:16:30,680 industry in the broadest terms. You know, he's been around for 293 00:16:30,680 --> 00:16:32,800 quite a while. He's been watching for for 294 00:16:32,800 --> 00:16:35,840 decades at this point. He says this is a cyclical 295 00:16:35,840 --> 00:16:40,800 thing, and every time fuel prices rise, weaker airlines are 296 00:16:40,800 --> 00:16:43,840 forced out of the market, He says that is often through 297 00:16:43,840 --> 00:16:48,040 consolidation. So he was basically joining the 298 00:16:48,040 --> 00:16:51,520 chorus of voices in the industry, in the industry who 299 00:16:51,520 --> 00:16:54,800 are saying that fuel costs could create the conditions for 300 00:16:54,800 --> 00:16:57,080 acquisitions. There's been a lot of 301 00:16:57,240 --> 00:17:01,200 combination talk lately. For example, JetBlue is in a 302 00:17:01,200 --> 00:17:05,200 difficult position financially, and it could be considering some 303 00:17:05,200 --> 00:17:08,920 of those options. United and Southwest and Alaska 304 00:17:08,920 --> 00:17:11,359 Air have been kicked around as possibilities. 305 00:17:12,119 --> 00:17:15,240 It seems likely this is just speculation on my part. 306 00:17:15,240 --> 00:17:18,880 I don't have any particular insight into this, but it seems 307 00:17:18,880 --> 00:17:22,119 likely that Spirit Airlines will be forced into the arms of a 308 00:17:22,119 --> 00:17:24,680 competitor like Frontier Airlines. 309 00:17:25,079 --> 00:17:28,160 That combination has been talked about a tonne over the past 310 00:17:28,160 --> 00:17:31,000 several years. Maybe with Spirit attempting to 311 00:17:31,000 --> 00:17:34,640 exit from Chapter 11 bankruptcy in the next few months, they 312 00:17:34,640 --> 00:17:37,880 could be more amenable to a tie up with Frontier given the 313 00:17:37,880 --> 00:17:43,040 rising cost of jet fuel. And of course, the big audacious 314 00:17:43,040 --> 00:17:47,560 idea that is out there right now is a merger between United and 315 00:17:47,560 --> 00:17:51,240 American Airlines. It sounds crazy to say out loud, 316 00:17:51,240 --> 00:17:53,880 and I'm not even sure I should utter those words, but there are 317 00:17:53,880 --> 00:17:57,920 reports floating around right now that United CEO Scott Kirby 318 00:17:58,440 --> 00:18:01,840 has advanced that idea to US lawmakers and regulators. 319 00:18:02,360 --> 00:18:06,520 The Trump administration, notably, is open to big business 320 00:18:06,520 --> 00:18:11,000 deals like this, but it is super unclear whether even this 321 00:18:11,000 --> 00:18:14,560 administration would get behind two of the very biggest airlines 322 00:18:14,560 --> 00:18:17,240 in the world becoming one company and everything that 323 00:18:17,240 --> 00:18:20,160 would entail from a monopoly standpoint. 324 00:18:20,840 --> 00:18:24,720 So this is all to say that big moves are more likely when 325 00:18:24,720 --> 00:18:28,200 airlines margins are under intense pressure like they are 326 00:18:28,200 --> 00:18:30,440 now. So this is something to watch 327 00:18:30,440 --> 00:18:33,600 moving forward and will likely account for some of the biggest 328 00:18:33,680 --> 00:18:36,200 airline stories through the rest of this year. 329 00:18:36,640 --> 00:18:39,000 Yeah, definitely. And I think, yeah, similarly, I 330 00:18:39,000 --> 00:18:41,720 can think of a few airlines in Europe which we could probably 331 00:18:41,720 --> 00:18:45,160 talk about in the same context. Thanks for your insight, Howard. 332 00:18:45,560 --> 00:18:46,960 Thank you. Nice talking with you, Lewis. 333 00:18:49,040 --> 00:18:51,760 You've been listening to Flight Global Focus, which is a 334 00:18:51,760 --> 00:18:55,520 production of Flight Global with audio editing by Lucy Johnson. 335 00:18:56,040 --> 00:18:58,480 If you want to get in touch with us or for commercial 336 00:18:58,480 --> 00:19:02,280 opportunities related to the podcast, please e-mail podcast 337 00:19:02,320 --> 00:19:06,000 at flightglobal.com. Listen, rate, review and 338 00:19:06,000 --> 00:19:08,240 subscribe wherever you get your podcasts. 339 00:19:08,920 --> 00:19:11,760 Join us again next week for more in depth analysis covering the 340 00:19:11,760 --> 00:19:15,120 latest developments in airlines, defence and aerospace. 341 00:19:15,560 --> 00:19:18,640 I'm Lewis Harper, and we'll see you next time for Flight Global 342 00:19:18,640 --> 00:19:19,280 Focus.