Surviving the worst perfect storm

June 1st 2022

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They are the biggest items on airline balance sheets: the cost of new aircraft and the price of the jet fuel needed to fly their fleets. Read More »

And right now, as the global airline fleet is progressively returning to service, the cost of one of these items is shooting through the roof. At press time, the average price per barrel of jet fuel had climbed above $170, a 14-year high.

The main reason is Russia; a major exporter of oil and the aggressor in a war with Ukraine. The resulting combination of shattering circumstances has cratered fuel supply chains across the world. The timing of this global crisis could not have come at a worse time for airlines, particularly in long-haul markets such as the Asia-Pacific.

Many airlines have absorbed some of the pain of the fiscal bombshell of doubling jet fuel prices with placed hedges, but these contracts have a limited life.

No one expects the price of oil to begin a correction any time soon so new hedging contracts will inevitably come at a higher price. For passengers this means higher fares at a time they already are upset with COVID-caused increases in air tickets. But in the present global economic environment, airlines have little choice but to pass on the cost of higher fuel to their customers. Some carriers already have introduced new fuel surcharges.

Will higher air fares hold back recovery in the airline sector? It remains to be seen. But it is another challenge airlines seeking to return to pre-pandemic passenger levels must overcame.

In the meantime, there is some good news. Airlines are ordering new-generation jets that will use less fuel.

Aircraft lessors also have been extremely flexible with their clients during the crisis by deferring payments and rearranging agreements. But in the end, the airlines will have to repay that patience.

Leased aircraft in the global fleet, now at 47%, will continue to increase in numbers because for many carriers leasing is the most economical means of acquiring aircraft. Additionally, in the Asia-Pacific, historically a very strong bank debt market, Boeing notes regional banks have been supporting their hometown airlines, a key to surviving these challenging times.

What has become clear is governments recognize the importance of airlines and their supporting industries to the economies of all nations. As a result, there is optimism funding to build or re-build the fleets of airlines, whether be it sale-leasebacks, bank or investor financing or even airline equity raisings, will be available to support the airline industry’s return to pre-pandemic operations.

TOM BALLANTYNE
Associate editor and chief correspondent
Orient Aviation Media Group