As sanctions against Russia continue, the US has banned Russian crude oil and the UK has said that it will phase out oil imports from Russia by the end of the year. As a result, oil prices have risen to very high levels. According to the Independent the price of Brent crude, which directly affects the price of airline fuel, has surged as high as 140 dollars a barrel; almost twice the price that it was at the start of the year.
High Oil Prices
As a result of high oil prices shares in airline companies have been badly hit according to the Financial Times, as global investors take fright. This has led the aviation industry being at the mercy of a global crisis for the second time; the first time being the global Covid pandemic which has also dealt a blow to the aviation industry. So how could airlines deal with the rise of oil and the consequent rise in airline fuel?
Airlines were previously hedging their fuel costs in order to control fuel prices. This means that they agree to commit to purchasing oil at a fixed price which is independent of the price of fuel at the time of receiving it. They often enter into fixed contracts for a fixed quantity of fuel at an agreed price for many months in advance so that they know the price that they will purchase fuel in for example 3 months time. This is normally a way of keeping costs constant and therefore not being exposed to unpredicted increases in the price of fuel.
However, having relied on hedging to keep costs constant airlines were badly affected at the time of the pandemic as they effectively had to pay for fuel that they did not actually need at a price that was much higher than the market rate. Because of this many airlines stopped hedging.
Wizz Air, according to the Financial Times, had stopped hedging completely. It was however having more difficulties as oil prices increased it became exposed after ramping up its schedules for this year with stock levels falling nearly 50% since mid-February to its lowest level in 18 months. The airline had to therefore reverse course and has now entered into fuel hedges for the next four months.
Ryanair has nearly fully hedged its fuel at $65 per barrel. British Airways owner IAG has hedges in place for 18 months between $60 and $73 dollars per barrel. So it seems many airlines have turned back to hedging fuel prices in order to control costs.
Longer Flight Times
For airlines, expenses are even more as airlines not only have to deal with high fuel costs, but they also have to deal with longer flight times as planes have to avoid Russian airspace. Reciprocal sanctions from Russia have meant that flying times could increase in time by up to three and a half hours. Finnair for example is going to take 4 hours longer for its flight from Helsinki to Tokyo.
According to Reuters news agency, the biggest impact is on flights between Europe an north Asian destinations like Japan, South Korea and China. However other affected routes include those between southeast Asia and Europe and the United States and India. Longer flight times can also lead to higher staff costs and less cargo carrying capacity. They can also lead to higher maintenance costs on contracts that are charged on a flight hour basis, said Brenedan Sobie, an independent aviation analyst based in Singapore.
As one can see airlines have a double whammy of dealing with Covid as well as the Russia sanctions. However as stated in the Financial Times, Airlines are used to dealing with geopolitical shocks. Analysts and Executives have said that demand for flying is strong in enough to recover from Covid. Let’s hope that the same is true about the Russia sanctions.