The aviation industry has seen off geopolitical turmoil, war, terrorism and oil crises throughout the decades, but a looming jet fuel crunch could bring a new set of challenges.
After warnings from airline bosses and energy experts that supplies would soon start to dwindle, Lufthansa was the first big European carrier this week to bite the bullet and cancel flights.
A total of 20,000 short-haul flights, including the Frankfurt to Cork route, were dropped by the German airline as it bids to reduce its consumption. Lufthansa was explicit that this was being done in response to rising fuel costs, as opposed to an immediate shortage of fuel.
Aer Lingus, on the other hand, announced a 2 per cent reduction in its summer schedule due to what it called “mandatory maintenance on aircraft”. Up to 23,000 passengers travelling on 430 flights could be disrupted as a result.
The decision was greeted with surprise by some travel industry observers – who questioned why this sort of maintenance couldn’t be organised in such a way that wouldn’t affect the company’s busiest and most lucrative trading period.
Irish aviation entrepreneur Ulick McEvaddy has spent the past few days attending a conference on air refuelling in the United States.
[ Will Ryanair have to follow Aer Lingus and cut flights?Opens in new window ]
“Nobody seems to have any solution to it,” he says.
McEvaddy has a bleak outlook on the rest of the year; he believes a significant number of flights are going to be grounded.
“A friend of mine is over here from Amsterdam and they just cancelled the flight on him,” he says.
“It’s going to be a very tough time with the wholesale cancellations of flights.”
He agrees the shock to the industry will probably be greater than that caused by the 1970s energy crisis.
“We don’t have any alternatives to the Strait of Hormuz. And if the Houthis shut down the Red Sea, which they probably will, we’re screwed,” he says, referring to the Iran-backed group in Yemen at the southern end of that sea, another key Middle Eastern shipping route.
“Can we get fuel in from the US? Yes, probably, but that will take some time and it is going to be costly as well. It’s a pretty substantial disaster.”
The entrepreneur believes the cost to Ryanair and Aer Lingus could be large “I think they’ll be hurt,” he says.
McEvaddy compares the potential impact of a prolonged closure of Hormuz to that of the Covid pandemic, which halted international travel.
“It’ll take months for this to return to normal. Even from today it would take two months. And that’s just a six-week shutdown,” he says.
“This is going to go on for months, by the look of it.”
As McEvaddy was reporting the cancellation of his friend’s return flight to Amsterdam, Dutch airline KLM was telling the media in Europe that it had grounded 150 flights due to rising costs.
It said it would not be operating 80 return flights out of Schiphol airport over the coming month as they were “no longer financially viable”. The airline said the cancelled flights over May represented under 1 per cent of its total.
As for Schiphol, Europe’s fourth-busiest hub, it said it would be offering a year-long, 10 per cent discount to carriers due to the spike in jet fuel prices.
On the other side of the fence from McEvaddy is Stephen Furlong, an aviation analyst with Davy. He is very critical of some of the reporting and the commentary around the jet fuel crisis.
“The reporting on this is inaccurate in my view – it would suggest that Europe is going to run out of jet fuel,” he says.
“It [jet fuel] certainly needs management – there is no question that there is an issue – but it is being made out as if it were an existential issue.”
Rather, Furlong believes the crisis is one where airlines exposed to the dramatic rise in the price of jet fuel will be forced to close down or pare back uneconomical routes.
“The price is not overstated – it has more than doubled. It is a very real risk to airlines,” he says.
He cannot say whether the Aer Lingus announcement of maintenance is a “cover” but suggests had it been made at any other time it would have drawn little interest in the media.
“We’ve seen a 1 or 2 per cent reduction in capacity from a number of airlines,” he says, pointing to similar reductions from the likes of United and SAS.
“What you are seeing with the more global airlines, such as Air France and all of the US airlines, is that they are adding significant fuel surcharges on long-haul,” he says.
“Air France is adding €50-€200 depending on what class you’re in. United said they are covering the oil price very significantly through price increases.
“Not all of the US airlines have hedges in place and they need price increases; they are more exposed than Aer Lingus, Ryanair and a lot of European airlines”.
Furlong says Aer Lingus and its parent group IAG have hedged about 62 per cent of their fuel costs for the year – close to the European average – while Ryanair has hedged on 80 per cent of its fuel costs.
The analyst reckons that price increases and further flight reductions are likely to intensify in the winter months if the crisis continues, but that the impact on European flyers will be less dramatic than that felt by those travelling with US carriers.
This is demonstrated by the guidance provided by the Chicago-based United Airlines earlier this week.
The carrier said it would recover 40-50 per cent of the increase in oil prices through fares and other measures in the second quarter, rising to 70-80 per cent in the third quarter and up to 100 per cent by the fourth quarter. In other words its customers will be paying the price of the US intervention in the Middle East.
Other airlines have been hiking the general cost of getting on board.
American Airlines has said it will increase baggage fees by $10 each for the first and second checked bags on domestic and short-haul international flights. If passengers want to add a third bag to the hold they face an eye-watering $150 fee. “Benefits” for economy passengers are also being curtailed in an effort to reduce costs.
Furlong believes solutions will be found over the summer months at certain pinch-points in the European airport network. This could involve the tankering of jet fuel from one location to another.
However, depending on how the situation in the Gulf evolves, airlines “might do something more radical in the winter – the cost base of oil has to be alleviated”.
As for now, the politicians in Brussels appear unfazed.
Following an emergency meeting of transport ministers last week, the EU transport commissioner – who also holds the tourism portfolio – seemed unconcerned about any risks in the short-term.
“There is no need at this point to intervene in how people live and travel,” said Apostolos Tzitzikostas on Tuesday. “There is no evidence of actual shortages”.
“I can tell you that there is no safer, more stable and more beautiful place to visit than Europe this summer,” said the Greek politician.
The immediate strategy of the EU seems to be one of monitoring stocks with a potential mind to draw up a plan for “voluntary” fuel sharing between EU member states.
As the weekend approached, the price of oil futures – now a guide to broad sentiment about where the Gulf conflict might turn next – had firmly re-established their perch above $100 a barrel.
The physical barrels are reportedly costing well in excess of that, depending on where the oil is being purchased.
Unless talks between the US and Iran manage to surprise the markets soon, the ongoing closure of Hormuz will ensure a more expensive holiday for many this summer.
