An Air Transat plane at Pierre Elliott Trudeau International Airport in Montreal. Air Transat has increased surcharges for flights to and from Europe as jet fuel prices spiked.Ryan Remiorz/The Canadian Press
Oil prices fell on Wednesday but high jet fuel prices are expected to weigh on the airline industry amid tight refining capacity, the head of the International Air Transport Association says.
The United States and Iran agreed to a ceasefire late Tuesday, raising hopes Iran would allow ship traffic through the Strait of Hormuz, which bears 20 per cent of the world’s crude oil and gas. It is also a major transitway for jet fuel, which has more than doubled in price and become in short supply amid the conflict.
Willie Walsh, director-general of IATA, told reporters in Singapore on Wednesday the shortage of jet fuel – and higher prices – will persist as refineries receive new shipments of crude and boost production.
The status of the ceasefire was uncertain late Wednesday as Iranian state media reported the country has closed the strait again. The BBC reported the Iranian navy is threatening to destroy ships that attempt to sail the waterway. Shipping in the strait was light on Wednesday, according to Vesselfinder.com.
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“If the ceasefire holds, I think the positive is that refined product will flow as well as crude,” Mr. Walsh said. “So, the concern at the moment is around the potential shortage of the refined product of jet fuel. It will take some time for refineries outside of the region to adapt and increase the supply.”
“It’ll take a little bit of time to get the jet kerosene [price] back to where it needs to be,” he said.
Airlines in Canada and around the world responded to the steep rise in oil prices caused by the war by raising fares, baggage fees and surcharges.
“These changes are intended to help offset increased operating costs while maintaining reliable service for customers,” said Alex-Anne Carrier, a spokeswoman for Air Transat TRZ-T, which has increased surcharges for flights to and from Europe and will do so shortly for sun destinations.
Several international airlines, including Delta Air Lines DAL-N and Air India, have cut flights.
Still, the rapid rise in jet fuel prices means most airlines are unable to recover all the higher costs, said Rohit Kumar, an analyst at credit rating agency Morningstar DBRS.
This is because most airline tickets are paid for weeks or months in advance, and airlines have limited means with which to recover costs.
“While airlines are likely to pass on part of the cost increase through higher fares and baggage fees, the speed and magnitude of fuel price increases limit full cost pass‑through and may damage some travel demand,” Mr. Kumar said in a note to clients.
Some airlines, including Air Canada AC-T and Air Transat, are partly protected from fuel price spikes with hedging programs. But no airline has hedged all its purchases, Mr. Walsh said. The average airline has a net profit margin of 4 per cent and cannot absorb a steep fuel price increase.
Air Canada and WestJet fuel surcharges are the tip of the iceberg for rising prices
Brent crude prices fell by about 13 per cent to less than US$95 a barrel, but they remain well above the US$65 level in February, before the war began.
The market has priced oil at US$80 a barrel by the end of the year, Mr. Walsh said, adding the industry has been profitable in recent times with oil priced at US$120 or $130 a barrel. Higher fares and, in some cases, reduced airline schedules can cover the added fuel costs without hurting demand for air travel, he said.
“It’s not going to be a crisis for the industry,” Mr. Walsh said.
Delta on Wednesday cut its second-quarter profit forecast and cut capacity to offset about US$2-billion in extra fuel costs for the period. Delta expects to pay US$4.30 a gallon for jet fuel in the next three months, more than double last year’s price.
Meanwhile, air travel in the Middle East shows some signs of rebounding. About 10 per cent of flights in the Middle East were cancelled on Wednesday. That’s unchanged from the previous two days, but an improvement from the 65-per-cent cancellation rate early in the war, according to Cirium, an aviation data company.
Air Canada flights to and from Dubai and Tel Aviv are suspended until Sept. 7. Emirates, Qatar Airways, Etihad Airways, Royal Jordanian Airlines and Saudia Airlines have all resumed flights to Canada.
Shares in Air Canada and Transat AT rose by more than 3 per cent on Wednesday while global airline shares also advanced amid hopes for an industry rebound.