Ian Taylor reports how a drop in the price of jet fuel has been offset by a host of other cost hikes
Airlines have consistently hailed higher fares in recent results statements, with Ryanair chief Michael O’Leary noting last month: “All our competitors report 20% fare increases.”
Fares are higher because of strong demand and lower capacity than pre‑pandemic and will be higher still at times and on routes in most demand. Yet carriers’ underlying costs have also risen, raising the baseline for profitability.
Price and wage increases have hit aviation like every other sector, with Iata forecasting an 8.1% rise in operating costs this year despite a substantial fall in the oil price.
Jet fuel cost just under $95 a barrel last week, 2% up on the week but 46% down year on year and 49% down in Europe – brought lower both by the fall in energy prices from the highs after Russia invaded Ukraine and by a narrowing of the gap between the prices of crude oil and jet fuel which was at a historic high through to March due to pressures on refining capacity.
However, jet fuel remains more than 2.5 times the price of 20 years ago and the world’s biggest oil producer Saudi Arabia is committed to maintaining the oil price at a minimum $80 a barrel to finance the enormous development projects under way in the country.
Iata estimates fuel will account for 28% of airline costs this year, down from 30% in 2022 but still four percentage points higher than in 2019.
It noted “industry profitability is fragile” last week, highlighting the risks of rising interest rates, escalation of the war in Ukraine, strains in supply chains and rising regulatory costs including “regional environment initiatives”.
O’Leary has acknowledged fares will increasingly have to reflect the cost of carbon, saying: “Environmental taxation will become a feature of European air travel in the next five years”. That is before the price of sustainable aviation fuel – currently between 2.5 and six times the price of jet fuel – and other costs of decarbonisation are factored in.
Iata director general Willie Walsh warned last week: “Cost pressure is acute . . . [and] many of those we do business with are adding to these pressures. Supply chain blockages are raising costs, and there are grievous examples of airports and air navigation service providers shifting costs to airlines.”
As examples, Walsh noted air traffic management costs in Europe had risen €1.9 billion this year on 2022 and Amsterdam Schiphol had raised charges 12%.
Wizz Air chief executive Jószef Váradi reported last week: “Fares are increasing. [But] the industry is exposed to significant cost rises.”
Crucially, rising interest rates are increasing the cost of debt and driving up aircraft-leasing rates, a significant factor as many carriers, including easyJet, lease more of their fleets now than pre-Covid, having completed sale-and-leaseback deals with lessors to raise capital during the pandemic.
The UK base rate, now 4.5%, was 0.1% barely 18 months ago. The US rate, now 5.25%, was zero. Both are set to rise further, with O’Leary noting last month: “Some lease rates are now 8%-9%.” These rates inflate daily operating costs and won’t diminish until rates fall.