Several U.S. airlines expect an increase in jet fuel prices to squeeze their revenues this year, following a busy summer season. Unexpectedly high fuel prices could mean lower profits for several airlines as the aviation sector moves into its lower air traffic season. While passenger numbers are beginning to return to pre-pandemic levels, ongoing inflation and high fuel costs could negatively affect the travel market over the coming months.
Various U.S. airlines expect reduced revenues due to the high price of jet fuel, which increased costs during the peak summer season. In early September, in Chicago, Houston, Los Angeles and New York jet fuel cost 30 percent more than just two months ago, at $3.18 a gallon. Typically this cost would be passed to the consumer through higher flight prices, but fares were lower than last year. Citi Research analyst Stephen Trent explained, “The relatively quick upmove in fuel has given the industry little time to respond through fares.”
Southwest Airlines is one of the airlines reducing its revenue outlook for the third quarter due to the increase in jet fuel price. It expects its revenues for this period to be between 5 and 7 percent lower than the same time in the previous year, which was worse than its July estimate of a 3 percent drop. The airline expects fuel to cost an average of $2.70 to $2.80 a gallon this quarter, higher than its previous $2.55 to $2.65 estimate.
And it’s not just Southwest that’s struggling to maintain its revenues in the face of rising costs. Alaska Airlines expects high fuel prices to harm its profits, while United Airlines is battling to maintain its revenue outlook as its fuel prices rise from around $2.80 to $3.05 a gallon. There will be a better understanding of the effects of the price increase when airlines report their quarterly findings in October.
At the global level, the International Air Transport Association (IATA) and S&P Global Commodity Insights data suggest that jet fuel prices averaged $119.82 per barrel at the beginning of August, compared to $97.78 a barrel at the beginning of July. This follows a rise in oil prices in recent months. The increase also reflects refinery disruptions in several areas of the world. In response to this rise, several airlines are expected to reconsider their fuel hedging strategies. It could also encourage carriers to push up flight prices to shift the cost onto the consumer.
In more optimistic news, airlines worldwide have been enjoying an increase in passenger numbers, as figures return to close to pre-pandemic levels. Global air traffic rose by 31 percent in June 2023 compared to June 2022. In the Asia Pacific, air traffic was 128 percent higher than in the previous year. Traffic reached 94.2 percent of pre-Covid levels by the end of Q2 this year, according to the IATA. Willie Walsh, the Director General of the IATA, stated “Planes were full during July as people continue to travel in ever greater numbers. Importantly, forward ticket sales indicate that traveller confidence remains high. And there is every reason to be optimistic about the continuing recovery.”
However, in the U.S., domestic travel is expected to begin falling, in line with seasonal trends. High inflation rates could also dissuade consumers from travelling in the lead-up to Christmas. While leisure travel has risen in the post-pandemic period, business travel is still lagging, which could add to this seasonal lull. Business travel returned to around 75 percent of its pre-pandemic level in 2022, with shorter routes seeing the weakest recovery as companies prioritised alternatives. British Airways hopes this figure will rise to 85 percent in 2023, but the outlook is still uncertain. While this recovery looks positive, the figure might not return to pre-pandemic levels due to the preference for remote working and online meetings to cut costs. Companies are also increasingly improving their ESG practices, which often includes cutting carbon emissions by flying less.
In addition to recent fuel price increases, consumers can expect to face higher flight prices in the long term as airlines invest in new aircraft and sustainable jet fuel, to decarbonise operations. Further, the aviation supply chain is still feeling the effects of the pandemic, with production at Airbus and Boeing falling significantly since 2019. Delivery targets for 2023 are currently about 75 percent of pre-pandemic numbers.
While the aviation sector experienced high passenger levels over the summer months, despite high inflation and consumer cost pressures, rising fuel prices could negatively affect airline revenues, forcing them to increase flight prices as they enter into the low season. Lower numbers of business travellers, compared to the pre-pandemic period, could exacerbate this issue. Meanwhile, investments in decarbonisation and the ongoing challenges in the aviation supply chain will likely lead to higher long-term flight prices for consumers.
By Felicity Bradstock for Oilprice.com
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