Air Canada aircraft at Vancouver International Airport in January. Some Canadian airlines have acknowledged that fares may rise, as fuel costs amount to about 30 per cent of operating expenses.Fred Lum/The Globe and Mail
Canadians may soon pay as much as 20 per cent more to fly, adding to a growing list of travel disruptions as the Middle East war hikes jet fuel costs and threatens to drive up airfare ahead of peak travel months.
Major global carriers such as United Airlines have already acknowledged that fares may rise sooner rather than later, as have some Canadian airlines.
“Fuel is the largest input cost for an airline,” WestJet spokesperson Julia Kaiser said in an e-mail to The Globe and Mail. With the situation in Iran already making operating flights more expensive, “it’s likely further pricing adjustments may be needed.”
For Porter Airlines, “it’s too early to forecast” how fuel spikes may influence its prices, spokesperson Robyn van Teunenbroek said. Air Canada’s Peter Fitzpatrick echoed the sentiment, saying that “markets are absorbing the effect of fast-paced events.”
How the Iran war is affecting countries in the Middle East and wider world
Fuel costs amount to about 30 per cent of airlines’ operating expenses, though they are just one of the factors behind air ticket prices, and which could make or break travel plans for Canadians in the coming weeks.
Violence across the Persian Gulf and the closing of the Strait of Hormuz after the United States and Israel’s attack on Iran have pushed jet fuel prices up about 33 per cent compared with last summer, rising from an average $0.88 a litre then to $1.17 a litre last week, according to data from National Bank of Canada.
The Middle East exports more than one million barrels of aviation jet fuel a day, making up about 17 per cent of total global consumption, according to estimates from the Oil Price Information Service.
“The price pressure on travelling gets high faster because a much larger fraction of the price is the direct price of oil,” said Normand Mousseau, scientific director of the Trottier Energy Institute at Polytechnique Montréal.
While roughly half the price of a tank of gas in Canada reflects the price of crude – the raw material refined to create gasoline, diesel and jet fuel – and the rest goes to taxes, refining and distribution, about 75 per cent of jet fuel’s cost is tied directly to crude.
Oil prices started Monday on a tear, reaching nearly US$120 a barrel after the Middle East conflict intensified over the weekend. In a volatile trading day, Brent crude, the international benchmark, reversed course and fell to about US$90 a barrel by the afternoon, and West Texas Intermediate plunged to about US$87.
“Within the next two weeks … the first thing you’ll see will be fuel surcharges,” said John Gradek, who teaches aviation management at McGill University. He expects added costs to appear on international flights first, followed by domestic routes about a week later.
For travellers within North America, Mr. Gradek forecasts more moderate cost hikes, with short-haul and regional passengers likely paying around 5 per cent to 10 per cent more, or “roughly the equivalent of $50 to $100.”
International flights across the Atlantic or other long-haul routes could see larger increases of as much as 20 per cent or more, or $200 to $300 because they typically use larger aircraft that consume enormous amounts of fuel.
But operating expenses are far from the chief determining factor of airfare costs, Mr. Gradek said.
“Tickets are basically set by the competitive behaviour in the marketplace – a carrier decides to increase their prices for whatever reason and the other carriers may or may not decide to take these prices depending on their competitiveness,” he said.
“Right now, you’re going into a season after spring break – what I would call a shoulder season in terms of demand in Canada – so you’re likely not going to see a crisis.”
That may change as the busy summer travel season approaches in May and June.
If oil prices remain high, airfare could increase more dramatically because airlines know travellers are willing to pay up, Mr. Gradek said.
In addition to fuel spikes, the Middle East conflict and closing of regional airspace are eliminating flight paths between North America and parts of Asia and Europe.
“Two weeks ago, a flight from Toronto to Delhi was about $1,000,” Mr. Gradek said. Just a few days ago, that price tripled before easing to just over $1,800 – still double the average price days earlier.
If a trip is happening within the next few weeks, Mr. Gradek advises purchasing tickets immediately. “If you want to travel to Europe, now’s the time to buy.”
The same goes for European trips in the summer, as those routes are more exposed to disruptions in the Middle East.
For domestic travel within Canada, flight prices will depend heavily on the competitive strategies of the country’s main airlines, Mr. Gradek said.
Air Transat spokesperson Andréan Gagné said in an e-mail the company maintains a hedging strategy that helps mitigate exposure to short-term price fluctuations. “Should the conflict persist over an extended period, fuel price impacts could become more significant, and appropriate mitigation measures would be evaluated.”
But a growing number of airlines have moved away from hedging in recent years, a practice that involved buying futures contracts to dodge price hikes down the line. Today, many rely on buying fuel at the spot market price.
“You basically pay the price that’s going in the marketplace at any point in time,” Mr. Gradek said. While the strategy may have previously enabled the airlines to pay lower fuel prices, it now exposes them to sudden cost spikes.