• Wed. May 11th, 2022
Recovery is slowing in the airline industry – Photo: Shutter Stock

Just as the airline industry has begun to recover from the coronavirus pandemic, it has been hit by geopolitical tensions that will affect its path to recovery.

While airlines have also had to deal with rising fuel prices over the past year, the further spike in fuel prices due to geopolitical tensions came as an unpleasant surprise.

Additionally, flight cancellations and reroutings will also negatively affect their profit margins. All of this should dampen the recovery for the coming quarter.

A sector in recovery

After nearly two years of suffering from closures and travel restrictions, the airline industry is finally showing signs of recovery.

The International Air Transport Association (IATA) reports that the financial strain on the industry is easing although it has yet to fully recover. In its sample of 87 global airlines, operating losses fell from 13.6% to 2.3% in the third quarter of 2021.

IATA reports that passenger revenue growth is increasing faster in economy class than in premium class.

The number of air passengers is also on the rise according to IATA calculations. In 2021, revenue passenger kilometers (RPK) increased to 41% of 2019 levels. In 2020, RPK remained at 34% of 2019 levels.

RPKs fell less in December (45.1%) than in November (47%) on a comparable two-year basis. As Omicron fades, the rise in passenger numbers is expected to continue, according to IATA. The report also points out that passenger growth is increasing faster for regional than continental flights.

Unexpected geopolitical issues

As the sector was barely recovering from the pandemic, a new wave of geopolitical issues arrived. This affected not only fuel costs, but also the number of air passengers.

Jet fuel prices have been on the rise since the beginning of 2021, so far, this is due to both demand and supply constraints. Spikes in demand have been seen as the global economy begins to reopen. At the same time, oil supply was weaker than expected

IATA comment: “The high price of jet fuel is adding pressure on airline operating costs just as revenues are being hit by Omicron-related flight cancellations. This could delay airlines’ financial recovery from the crisis.

The recent conflict between Russia and Ukraine will only contribute to these cost increases. These tensions have also led to flight cancellations and reroutings, which have had measurable consequences for the industry.

Rico Luman, senior economist at ING, tells Capital.com:

“The mutual closure of airspace due to the Ukrainian conflict is causing a new wave of cancellations, not only for destinations in Russia and Ukraine, but also for the moment for several destinations in Asia. Avoiding space Russian airline has also resulted in flights several hours longer (e.g. to China, Japan) and possibly additional layovers.This will make these journeys less efficient and increase the cost of fuel even more, leading to a higher price. tickets. “

According to IATA data, the Russian airline industry was the only region to see positive RPK growth in 2021, with regional and continental flights. It remains to be seen if the trend will continue in 2022.

Not all airlines are the same

Airlines are by nature very sensitive to fuel costs. According to a report by ING, fuel costs can represent on average 20-25% of total costs, and can also reach 30% on occasion.

Due to current rising costs, airlines that are fully exposed to fuel spot rates will now see their total costs increase by 15% compared to the same period last year. Companies that are exposed to spot prices include some of the high cost carriers. With relatively higher margins, they are able to absorb these costs and therefore do not need to hedge.

IAG (British Airways) falls into this high cost category. In its most recent results released on February 25, IAG commented, “Both operating income and free cash flow from operating activities will be significantly positive for the year. This assumes no further setbacks related to Covid-19 and government-imposed travel restrictions or the material impact of recent geopolitical developments.

The ING report also highlights geographic differences, with European airlines tending to hedge more than their US counterparts.

Outlook

Luman says the uncertainty behind the current geopolitical situation could hold back the return of travel for many people. He expects, at least for the spring, that the rebound in the airline industry will be moderate.

Luman concludes: “The current geopolitical threat and its consequences in terms of sanctions will inevitably have an impact on airline results this quarter. It’s another setback for airlines, with many yet to return to profitability. But for US-based airlines, the impact will likely be less severe than for European airlines, and the impact for low-cost carriers will also be less than for traditional intercontinental carriers.

Further reading:

Southwest Airlines plane preparing to land
British Airways Embraer 190 and Lufthansa A380 at Frankfurt Airport