• Wed. Oct 5th, 2022

The ease of rules related to the coronavirus pandemic had the airline industry looking to 2022 with optimism. But in the last week of February, the military conflict between Russia and Ukraine cast a large shadow over the travel and airline industry’s expectations for recovery. The sanctions imposed by Western countries are already having an impact on travel and will create additional costs for the airlines concerned.

Opinion of Bogdan Maioreanu, eToro analyst

After two years of the Covid pandemic, with an ease of restrictions in sight, the summer of 2022 was shaping up to be very strong for European and American airlines and travel companies. Bank of America valued at the end of last year that due to the recovery, the easing of the pandemic and summer travel, jet fuel demand could push the price of oil to $120 a barrel. Two months later, oil is already close to 120 dollars a barrel but not because of overbooked planes but for the sake of supply disruption. Kerosene price increase over 60% last year and up 5.1% from last month. The fuel is 19% of total expenses for global airlines, before the recent price spikes. Increasing the airline’s fuel costs as they recover from the Covid pandemic-induced demand destruction could drive weak businesses to the ground.

In January of this year, the airline industry forecast for 2022 was considering global airline revenue of $432 billion in the baseline recovery scenario, representing 65% of 2019 revenue. By the end of the year, global air travel demand could return to 84% of 2019 levels in the baseline scenario. To IATA – International Air Transport Association – forecast showed that airlines around the world do not expect, while returning to normal operations, to reach 2019 levels before 2024. The current conflict does not allow for a return to normal and has enormous potential to set back this goal.

The closure of EU, UK and US airspace to Russian planes and similar Russian retaliatory measures are making travel routes longer and planes consuming more fuel, increasing their costs. Already, airlines are canceling or rerouting flights. The German group Lufthansa (LHA.DE) said 30 flights to Russia are canceled this week and flights from Europe to Tokyo and Seoul are expected to take detours. Air France KLM (AIRF.VI), Finnair continues to operate flights to Thailand, Singapore and Delhi using alternative routes which add approximately one hour to flight time. Virgin Atlantic said avoiding Russia would add 15 to 60 minutes on flights between the UK and India and Pakistan, according to the BBC. Scandinavian Airline SAS (SAS.ST) had also suspended its Copenhagen-Tokyo service. Russian carrier Aeroflot said it canceled flights to the United States, Mexico, Cuba, the Dominican Republic and all flights to European destinations.

Shipping container shortages and port bottlenecks mean more products are transported by air. Last year, air cargo demand was 6.9% above 2019 levels, according to IATA. Air freight is the most affected by the situation in Ukraine, adding to existing supply chain issues. Finair (FIA1S.HE) and Virgin Atlantic have already canceled North Asian cargo flights due to closed access to airspace, while other companies are trying to readjust their routes. But this comes with a loss of business and additional costs. Punishments “does not in any way close an air corridor between Asia and Europe. It just gets a bit more complicated to drive it,” noted a former cargo manager at Delta Air Lines (DAL).

This situation, which affects the airlines of countries that impose sanctions on Russia, creates business opportunities for others. The number of flights through Kazakhstan triple and Middle Eastern carriers such as Qatar Airways, Emirates, Etihad, Saudia and Turkish Airlines have increased their market share outside of China, where they are already operating approximately 20 to 25 flights per week. EVA Airways of Taiwan (2618.TW) noted that its cargo flights to and from Europe are operating normally and that it would consider adding more services to meet market demand. Russian carriers, which account for around 70% of flights between Russia and the EU, are the most affected. Taking advantage of the immobilization of the Russian AN124 fleet and the destruction of the largest cargo plane in the world, the unique AN 225Airbus (AIR.PA) East transform its oversized Beluga jets in-house into serviceable aircraft offering logistical air transport for oversized shipments.