An aircraft of German air carrier Lufthansa takes off from the Berlin Brandenburg Airport last week. The airline recently cancelled 20,000 flights over the next six months to save 40,000 tonnes of fuel.Lisi Niesner/Reuters
Marco Mori, owner of Gusto Cycling, an Italian-British bicycle tour company in Tuscany, recorded his first fuel shortage-related cancellation the other day.
He said his Australian clients, who had booked a bike tour of Tuscany in June, called off their trip in fear that their flight to Italy, via Abu Dhabi, would get cancelled or that the airline would not be able to get them back home once the holiday was over.
“Australians are afraid to come to Europe because various Middle East airlines cannot guarantee summer flights,” he said. “I have heard of other tour operators seeing group cancellations.”
Airlines everywhere are raising ticket prices, adding surcharges and trimming flight schedules as the Strait of Hormuz remains effectively closed. Normally, nearly one-fifth of kerosene-based jet fuel passes through the strait on its way to the Indian Ocean and onto world aviation markets.
The impending fuel shortage is reflected in the price of jet fuel, whose increases have far outpaced that of crude oil.
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The International Air Transport Association reported an average jet-fuel price of almost US$185 a barrel for the week ending April 17 (the latest date available). That’s about double the price in January, the month before the U.S. and Israel began their attacks on Iran. By comparison, Brent crude, the international oil benchmark, has climbed about 55 per cent, to US$106, over the same period.
The European jet-fuel market, which relies heavily on fuel supplies from the Persian Gulf, is getting hit especially hard, making some travellers recalculate their summer holiday plans. On April 16, Fatih Birol, executive director of the International Energy Agency, told the Associated Press that Europe has “maybe six weeks or so” of jet fuel left if Hormuz remains closed; it remains largely shut even though a ceasefire is in place.
ACI Europe, the trade association of European airports, delivered a similar warning. In an April 10 letter to the European Commission, it warned that “systematic aviation fuel shortages will become a reality within the next three weeks” unless Hormuz shipping is unimpeded, as it was before the war.
In a note published Monday, SG Commodities Research, a division of the French bank Société Générale, said that the high jet-fuel prices will not automatically increase supplies, since they are physically constrained by the Hormuz choke point. “Prices can be managed, physically scarcity cannot,” it said. “The distinction is critical: paying more for energy is manageable; not having it is existential.”
SG said Europe faces an aviation crisis because domestic refinery production covers only 1.1 million barrels a day of jet fuel, well short of the 1.6 million needed. The difference – 500,000 barrels a day – has to be imported, mostly from the Middle East.
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If Europe manages to replace 75 per cent of the shortfall with imports from the United States and elsewhere, severe fuel shortages probably would not arrive until August. But if only 50 per cent of the shortfall is covered, it expects fuel shortages in June. “Despite the current record of U.S. imports, the 50 per cent scenario appears most likely,” SG said. “Higher airfares have yet to curb demand meaningfully.”
A JP Morgan report published last week said that fuel shortages “will likely lead to summer capacity cuts from June onwards, starting with domestic and marginal routes.” The Wall Street bank said that Britain was at higher risk than other European countries because of its heavy dependence on Middle East oil.
Airlines are managing the real and expected shortages by raising ticket prices and removing capacity, especially on short-haul and low-demand fights. Andrew Nocella, United Airlines’ UAL-Q chief commercial officer, last Wednesday said the carrier had raised prices five times since the war on Iran started on Feb. 28 and that about 5 per cent of total capacity will be removed by the end of 2026, suggesting he does not see a quick fix to the fuel constraints.
Germany’s Lufthansa DLAKY, Europe’s second-biggest airline, after Ryanair RYAAY-Q, seems to be leading the charge in the cutbacks’ campaign. A week ago, it said it will cancel 20,000 flights over the next six months to save 40,000 tonnes of fuel. It is taking the axe to short-haul flights, run by its Lufthansa CityLine subsidiary. In addition to extensive route cuts, CityLine has grounded 27 of its aircraft.
Europe’s vast network of high-speed trains means that reducing short-haul flights should be only a minor inconvenience for most business and leisure travellers.
Some airlines and tour companies are warning that revenue and profits will fall as fuel becomes scarcer.
On April 22, Germany’s TUI Group, Europe’s largest tour operator and the owner of a fleet of aircraft, suspended its revenue guidance and cut its underlying profit forecast. The company’s shares are down by about 40 per cent since the war started even though its fuel prices are almost fully hedged through the summer.
Hedging is a common risk-management strategy that sees companies use options, futures contracts and other financial instruments to lock in a price for fuel regardless of the spot market price.