After surviving the chaos of the pandemic, the world’s biggest airlines are facing a new crisis before the last one is even over.
Russia’s invasion of Ukraine has driven oil prices to their highest level in 14 years and triggered a series of unprecedented flight bans around the world.
Investors took fright and sent airline stocks tumbling, leaving the industry at the mercy of a global crisis for the second time in as many years.
“We faced the plague, only to be visited by a war,” said Ryanair chief executive Michael O’Leary. “I think it’s going to be very difficult for most airlines over the next 12 months.”
Airlines are used to dealing with geopolitical shocks and executives and analysts believe demand for flights is strong enough to help passenger numbers recover from Covid-19.
But Russia’s invasion of Ukraine comes at a critical time as it threatens to hit flight demand, testing carriers’ shaky balance sheets and delaying a return to profits after the industry racked up an estimated £200billion pounds of pandemic losses.
Lufthansa chief executive Carsten Spohr said the company faced “another challenge” related to “unimaginable events”, as the airline last week warned of uncertainty arising from the dispute.
“We are looking at a delay or some sort of interim setback in the path of airline financial recovery,” said Philip Baggaley, chief executive of S&P Global.
The immediate financial problem is soaring crude oil prices, which hit $139 a barrel, at a time of broader inflationary pressures.
Fuel can account for up to 35% of airline operating costs, according to Scope Ratings and several carriers in Europe have changed their coverage policies after being stung by a collapse in oil prices and demand for flights in 2020.
Low-cost carrier Wizz Air has stopped hedging altogether, leaving it exposed as it ramps up its schedules this year. Its stock has fallen nearly 50% since mid-February to its lowest level in 18 months.
The airline backtracked on Monday and announced it had entered into fuel hedges for the next four months.
Ryanair is almost fully hedged this year at $65 a barrel, while British Airways owner IAG has hedged between $60 and $73 a barrel for the next 18 months, according to analysts at Raymond James.
In the United States, many airlines that were hedging have backed down over the past five years because “the industry has consolidated enough that airlines have more pricing power,” Baggaley said.
Only Southwest Airlines and Alaska Airlines cover fuel, giving them more cushion than the nation’s three largest carriers, American Airlines, United Airlines and Delta Air Lines. The Southwest is 64% covered and Alaska has covered up to half of its estimated fuel burn for 2022, the airlines said.
High fuel costs don’t always hurt airline profits. IAG chief financial officer Steve Gunning noted that the company managed to achieve operating profit margins of 14.4% when the price of oil was last at $100 a barrel.
But analysts question whether airlines will be able to pass the costs on to customers in times of fragile off-peak demand. Rising household energy prices could also hurt consumer confidence and purchasing power.
Raising the cost of tickets in response to high oil prices will not be enough for US airlines. They will have to reduce capacity during off-peak periods, said Savanthi Syth, managing director of Raymond James. As demand has not fully returned, “it is more difficult to absorb this genre[s] fuel-related shocks,” she said.
Another of the new issues are tit-for-tat flight bans. These have left Russian carrier Aeroflot locked out of nearly all European and North American skies, while European airlines are no longer able to take shortcuts north through Russia to reach Asia, the causing more fuel to be consumed.
Investors wiped out a fifth of Finnair’s market value last week after warning its flights to Asia were unsustainable without crossing Russia, prompting them to start talks with the government over financial aid.
“The situation is having a huge impact. . . Finnair is currently preparing further traffic and cost reduction plans in case the situation continues,” Chief Executive Topi Manner said. The airline has since restarted some routes on longer flight paths.
For many airlines, the situation is tempered by the fact that routes to Asia have been the slowest to recover due to travel restrictions in the region.
“The places where we fly over Russian airspace, we don’t really fly by the minute, we’re able to reroute our network,” British Airways boss Sean Doyle said last week.
But beyond the short term, carriers face longer and more expensive trips to growing markets, including China and India. And when markets reopen, Gulf airlines could have a competitive advantage due to their southerly flying habits.
Stephen Furlong, an analyst at Davy, said more popular routes could also be hit by overcapacity if airlines transfer resources from Asia. “Ten years ago we had profit warnings on transatlantic flights when Asian markets were weak,” he said.
The key to future health and perhaps the biggest unknown is what the war will do to consumer confidence and flight demand.
Both Lufthansa and Ryanair reported a slowdown in ticket sales when the war broke out, although O’Leary hopes this was a temporary accident.
“When conflict breaks out in the world, we see a slowdown in demand. But I can’t quantify that reduction yet,” Spohr said.
Several industry figures recall the first Gulf War in 1990-91, when the number of American tourists to Europe plummeted due to the region’s relative proximity to the Middle East.
In the latest crisis, domestic and short-haul airlines are likely to fare better, while long-haul airlines, which have suffered the most during the pandemic, are more exposed.
“That won’t stop the Brits from going to Malaga this summer, I don’t think. But might the Americans not want to go to Berlin, for example?” says Furlong.
Additional reporting by Joe Miller and Alexander Vladkov in Frankfurt