As crude oil prices soar to their highest level of the year, reaching $95 per barrel due to production and export cuts by Saudi Arabia and Russia, European airline passengers may soon see an increase in ticket prices. This surge in oil prices has already led to share price declines for US airlines and profit warnings, despite a strong summer season with many airlines reporting record profits.
The expected rise in airfares is also linked to high demand for travel, coupled with limited aircraft availability resulting from retirements during the pandemic and supply chain shortages. Finnair’s CEO, Topi Manner, anticipates further fare increases as airlines grapple with unprecedented fuel costs. Andrew Lobbenberg, an aviation analyst at Barclays, shares this view and foresees European airlines adjusting their flight schedules in response to rising expenses.
Adding to the industry’s challenges, airlines are paying a significant premium for jet fuel, which has reached $130 per barrel. Francesco Di Salvo from S&P Global Platts attributes this surge to robust travel demand and a shortage of jet fuel in Europe due to OPEC cuts, sanctions on Russia, and high demand for other refined products like diesel.
Despite these challenges, European airlines have an advantage over their global counterparts as they hedge against sharp fluctuations in fuel prices. Barclays estimates that European carriers have hedged between 60% and 80% of their anticipated fuel needs for the last quarter of this year and between 16% and 45% for 2024.
In contrast, US airlines typically do not hedge against fuel price fluctuations, leading to a series of profit warnings due to rising fuel costs. Delta and American Airlines both revised their third-quarter guidance downwards last week because of escalating fuel expenses.
However, aviation industry consultant Chris Tarry cautions that airlines can only pass on these costs to customers if the surge in travel demand continues, predicting a challenging winter for carriers.
Signs of weakening demand, particularly on domestic routes, are already evident in the US. Data from ticketing company Hopper shows that average airfares for US trips in September and October were down 29% from peak summer months, at $211 per ticket. This represents a 9% drop from last year and a 10% decrease compared to 2019.
The combination of profit warnings and demand concerns has triggered a sell-off in airline shares, with the MSCI World Airlines Index declining 16% over the past three months, and the US airline index falling over 20%, entering bear market territory.