Passengers are being urged to prepare for steep airfare hikes, as bans on Russian oil may cause the price of jet fuel to skyrocket.
Alan Joyce, Qantas’ CEO, predicts prices could rise by 7% as crude oil prices soar following Russia’s invasion of neighbouring Ukraine. Others warn increases could be higher still.
The fluctuation in oil prices comes amid the US, UK and Australia all banning oil imports from Russia, one of the largest oil exporters globally.
If the EU introduces similarly tough embargoes on Russian oil, prices will almost certainly rise further – “This would be catastrophic for airlines.” says Rico Merkert, a Professor at the University of Sydney studying transport supply chains.
Will increasing capacity level out prices?
Jet fuel typically makes up 30% – 40% of operating costs for airlines. Professor Merkert went on to say that “you don’t have to be a maths expert” to see that a price increase of even 20% will have a significant impact.
Ravi Kumar, head of Continental Travels Australia, urges travellers to buy early to avoid the worst of any increases yet to come – “We don’t know if it will be a minor increase or grow to a major increase, but we can expect some jump.”
However, some onlookers are less concerned about the impact of price rises as they anticipate increasing capacity to counter the effects.
“Most airlines are currently operating at 10% to 25% of their capacity”, according to Tom Manwaring, chair of the Australian Federation of Travel Agents.
In the coming months, Mr Manwaring predicts international carriers will allow more seats to become available, driving down the cost to travellers – “Competition between airlines as that happens will help level prices back out.”
Impact larger on smaller carriers
Larger airlines may be better protected from any rises, says Professor Merkert. For example, according to Mr Joyce, Qantas has hedged 90% of its fuel needs for the next three months, which will give the airline time to “react” to any future increases.
Professor Merkert said smaller or newer airlines that compete on cost were less likely to secure a hedging contract, so fuel price hikes have the potential to have a much bigger impact.
Will increased capacity be enough to level out fuel cost increases? Let us know your thoughts in the comments below.