Energy crisis ‘first bump in the road’ for aviation since Covid
Financially weak airlines, particularly those that avoided hedging on fuel costs and focus on leisure travel, are more exposed to financial distress amid persistently high fuel costs, according to consultancy Alton Aviation.
John Mowry, managing director of Alton Aviation, said the energy crisis is the “first bump in the road” for aviation since the pandemic.
Jet fuel prices more than doubled after the Iran war started, leading to massive flight cuts and driving Lufthansa CityLine and Spirit Airlines out of business.
Jet fuel typically accounts for 30% of an airline’s total expenses.
Before the conflict, the consultancy predicted 5-7% air traffic growth globally for this year, but now a readjustment is needed depending on how long the conflict persists.
Mr Mowry said the growth is less about a regional focus and more concerned with how airlines are positioned. Airlines that effectively practice fuel hedging are more protected from cost increases and don’t have to raise fares to the same extent as carriers that are not hedged.
He said low-cost airlines face different scenarios from full-service carriers. Full-service carriers tend to accommodate business travellers, who still need to travel for meetings and are willing to pay higher airfares.
Airlines that focus on leisure travellers are marred by the higher fuel prices as these passengers are more price-sensitive.
Mowry: Tough road for airlines
Some airlines are still struggling financially from the pandemic period, said Mr Mowry.
When costs skyrocket because of a foreign war, it greatly affects the airlines that are financially at risk, he said.
“An important detail is how long this crisis lasts, and how long fuel prices stay elevated,” said Mr Mowry.
“If prices remain high for a long time, it will be hard for a lot of airlines.”
He said airlines are increasing fares and raising ancillary costs, hoping to avoid hurting travel demand.
Meanwhile, some airlines are adding direct flights between Asia and Europe to take market share from Middle East carriers, as some of them haven’t fully resumed flights.
Aircraft lease extensions could also slow as airlines may not need as much capacity as expected, said Mr Mowry.
The past 3-4 years have been solid for leasing companies due to an aircraft shortage from supply chain disruption and manufacturers’ delayed deliveries, pushing airlines to extend their aircraft leasing contracts with lessors.
If the downturn is prolonged, airlines are likely to park aircraft, particularly older and less fuel-efficient jets, he noted.
Airlines will continue to accept new aircraft deliveries, which are 15-20% more fuel efficient than older models, retiring older aircraft from their fleets, said Mr Mowry.
Regarding after-market business, such as maintenance, repair and overhaul providers, he said the sector could dip in demand due to reduced flight hours and utilisation.
Owners of these aircraft and equipment may decide against costly heavy checks or engine overhauls if sustained high fuel prices pose challenges for future demand, opting to retire aircraft and sell their parts instead, noted Mr Mowry.
