GLOBAL airline chiefs opened their annual summit in Rio de Janeiro on Saturday, June 7, facing a sharper test of the industry’s post-pandemic recovery, as the Iran war drives up fuel costs and disrupts airspace while carriers try to cushion the blow with higher fares and tighter capacity.
The June 6-8 annual meeting of the International Air Transport Association (IATA) comes as that fuel shock collides with another problem airlines cannot quickly fix: a shortage of new aircraft.
Boeing and Airbus delivery delays have forced many carriers to keep older, less fuel-efficient jets in service for longer, raising maintenance and fuel bills just as oil prices have climbed.
IATA, which represents more than 370 airlines accounting for about 85% of global air traffic, had forecast a record $41 billion in net profit this year for the industry before the war. Industry executives and analysts expect that outlook to be lowered at the meeting.
A Deloitte survey of 21 global airline CEOs published this week found that fuel price volatility and inflation sit at the top of the industry’s risk agenda, pushing carriers to focus more heavily on cost control and financial health.
Brazilian airline Azul is planning to trim more flights to meet demand due to higher jet fuel prices, CEO John Rodgerson said.
Nikhil Ravishankar, CEO of Air New Zealand, said airlines can only raise ticket prices so much to offset higher fuel costs.
Airlines have two primary costs: fuel and labor. Sudden increases in fuel are hard to absorb because many tickets are sold weeks or months before travel. Longer routes also burn more fuel and make aircraft and crews less efficient.
The challenge is how much of the latest fuel hit can be passed on to travelers before higher fares start to weaken demand.
Fare power
So far, travel demand has held up in several large markets, especially among premium and corporate travelers, giving carriers more room to raise fares.
In the United States, domestic published fares as of May 25 showed robust demand and successful pass-through of higher fuel costs, with one-week-out fares up 35.8% year-on-year and four-week-out fares up 39.4%, according to Raymond James.
Still, there are limits. Higher fares can help airlines recover part of their fuel bill, but they also risk pushing out travelers with tighter budgets. That risk is greater in regions where currencies are weak, consumer spending is under pressure or airlines lack the pricing power of large network carriers.
Planemaker Embraer is seeing some airlines delay decisions on whether to exercise aircraft purchase options, its CEO told Reuters.
Philippine Airlines will order new planes, perhaps in the next couple of months, the company’s president said on Saturday. (Reuters)
