Will oil price rally mean even higher air fares?

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Airline passengers in Europe face the prospect of higher ticket prices following a rally in the price of oil which has threatened carriers’ booming profits.

Crude oil has risen to $95 per barrel this week, its highest levels of the year, following production and export cuts by Saudi Arabia and Russia.

The rise in prices has triggered a wave of profit warnings from US airlines and a fall in share prices on both sides of the Atlantic, even as the industry completes a strong summer of flying which has seen many carriers report record profits.

Air fares have already risen sharply this year, as carriers cash in on high demand for travel at a time of constrained supply of aircraft, following retirements during the pandemic and supply chain shortages.

Topi Manner, the chief executive of Finnair, said he expected ticket prices to rise further in response to airlines facing historically “very high levels” of fuel costs.

“In a high fuel environment fares obviously would need to reflect that . . . short term volatility points towards increasing fares,” he said.

Andrew Lobbenberg, aviation analyst at Barclays, also said he expected ticket prices to rise in Europe as airlines trim their flying schedules in response to rising costs.

To make matters worse, airlines are paying a significant premium for jet fuel, which has risen to $130 per barrel.

Francesco Di Salvo, an executive at S&P Global Platts, a commodity price reporting agency, said jet fuel prices have rallied because of strong demand for travel and a “structural deficit of jet fuel” in Europe amid OPEC cuts, sanctions on Russia and high demand for other refined products, including diesel.

But Lobbenberg said European airlines were at a “significant advantage” to their global rivals as they buy protections to insulate against sharp swings in fuel prices, and there are still signs of pent-up demand for travel that should support higher prices.

European carriers have hedged between 60 per cent and 80 per cent of their expected fuel needs for the final quarter of the year, and between 16 and 45 per cent for 2024, according to Barclays estimates.

US airlines typically do not hedge and have issued a series of profit warnings because of fuel prices. Last week Delta and American Airlines slashed their third-quarter guidance on rising fuel costs.

Chris Tarry, an aviation industry consultant, said carriers face a challenging winter and airlines would only be able to pass the costs on to customers if the boom in demand for travel continues.

“Airlines will tell you they will try to pass it through, but like any cost you can only pass it through when you have excess demand,” he said.

There have been signs that ticket prices in the US have fallen as demand weakens, particularly on domestic routes.

Airfares for US trips in September and October averaged $211 per ticket, according to data from ticketing company Hopper released last week, down 29 per cent from the peak summer months.

While this in part reflected typical season changes in fares, the autumn prices were down 9 per cent from last year, and 10 per cent lower than 2019.

The profit warnings and demand worries have contributed to a sell-off in airline shares, which have tracked lower in recent weeks, in line with the rise in crude oil.

The MSCI World Airlines Index has fallen 16 per cent over the past three months, while the index tracking US airlines has fallen more than 20 per cent in the same period, entering a bear market.