Few stories have dominated headlines more than the rise in global energy prices in recent times, apart from maybe the incident at the Oscars. For the world’s airlines, rising fuel costs are a particularly unwelcome development, coming just as many were starting to see demand recover.
According to IATA’s jet Fuel price monitor the price of jet fuel on 18 March was up 31% over the previous month, and up nearly 108% year-on-year. The recent increase in oil prices has been significant but in fact volatility in prices isn’t at all unusual in this market.
Many airlines have hedging strategies with a view to limiting the impact of the volatility.
In terms of their pricing, airlines have traditionally found it quite difficult to pass on additional fuel costs to customers because price increases tend to reduce demand and balancing capacity, pricing and demand in highly competitive markets is very challenging.
In the current environment, the challenges facing airlines vary quite considerably. In general, though, capacity in most markets is still reduced from 2019 levels, and many airlines retired their oldest, least fuel-efficient aircraft during the pandemic. In addition, demand is recovering strongly as covid-related travel restrictions have eased.
As a result, we have seen some airlines increase fuel surcharges and some have increased fares 5 – 10%. Many US airline executives have expressed confidence that they will be able to increase fares. For example, speaking at a JP Morgan conference in mid-March, Glen Hauenstein, President at Delta Air Lines, commented “I think a lot of industry observers have questioned whether or not the industry will be able to pass on the higher cost of fuel to the end consumer. We at Delta, given our demographics and our average clients, feel that that is something that we can easily achieve… we need to recapture somewhere between $15 and $20 each way on a ticket, on an average ticket value of about $200, so somewhere under 10%.”
Booking ahead
There are factors that play into a rise in airfares that are not entirely due to jet fuel prices. Seasonal fluctuations and a surge in demand post-pandemic play a role.
Nevertheless, many customers will now be reviewing how they can avoid slightly higher fares.
Booking further in advance to lock in a low price is always a good strategy. For business travelers, who tend to book closer to travel, this isn’t always so straightforward, so corporate travel buyers will be considering other options to reduce exposure to higher prices.
Sustainable aviation fuel: Ready for take-off?
In some ways the current increase in jet fuel prices is providing a foretaste of an issue that more airline customers will have to consider.
Sustainability is a key consideration for many corporations and the airline industry is increasingly looking to the use of Sustainable Aviation Fuel (SAF) as an important tool to reduce the CO2 emissions associated with air travel. For now at least, the cost of SAF is much more expensive than traditional jet fuel. In part this is due to the higher costs of production, which is still at relatively small scale. IATA estimated in late 2020 that the cost of production for SAF was two to four times higher than normal aviation fuel. Earlier this year Air France-KLM announced a surcharge to cover the expense of increasing its usage of SAF on its flights departing from France and the Netherlands, in response to government regulation.
While all of us hope that the situation in Ukraine improves quickly and also leads to a decrease in oil prices, the question of how companies and individuals should adapt their travel purchasing in response to higher fuel costs is going to be a consideration for some time to come. For many, the knowledge that fluctuations are nothing new, and several factors play into the current increase is a comfort, as is the knowledge that it is worth paying a little extra for more sustainable air travel and thoughtful, fruitful business trips.
