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 sent the price of oil skyrocketing to a 14-year high and set off a sequence of unprecedented flight bans around the world.
Investors have taken fright and sent airline shares tumbling, leaving the industry at the mercy of a global crisis for a second time in as many years.
"We have dealt with the pestilence, only to be visited with a war," said Ryanair chief executive Michael O'Leary. "I think it's going to be very difficult for most airlines for the next 12 months."
Airlines are used to dealing with geopolitical shocks and executives and analysts think demand for flying 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 demand for flying, testing the fragile balance sheets of the carriers and delaying the return to profits after the industry racked up an estimated £200 billion (€240 billion) of pandemic losses.
Lufthansa's chief executive Carsten Spohr said the company faced "another challenge" from the "unimaginable events" as the airline last week warned over the uncertainty stemming from the conflict.
"We're looking at a delay or somewhat of an interim setback in the airline path to financial recovery," said Philip Baggaley, a managing director at S&P Global.
The immediate financial problem is the soaring price of crude oil, which has risen as high as $139 (€127) per barrel, at a time of broader inflationary pressures.
Fuel can represent up to 35 per cent of airline operating costs, according to Scope Ratings and several carriers in Europe changed their hedging policies after being stung by a collapse in the price of oil and demand for flying in 2020.
Low-cost carrier Wizz Air stopped hedging completely, leaving it exposed as it ramps up its schedules this year. Its stock has fallen nearly 50 per cent since mid-February to its lowest level in 18 months.
The airline on Monday reversed course and announced it had entered into fuel hedges for the next four months.
Hedged
Ryanair is nearly fully hedged this year at $65 per barrel, while British Airways owner IAG has hedges in place at between $60 and $73 per barrel for the next 18 months, according to analysts at Raymond James.
In the US, many airlines that were hedging pulled back over the past five years because “the industry has become consolidated enough that the airlines have more pricing power”, said Baggaley.
Only Southwest Airlines and Alaska Airlines hedge fuel, giving them more of a cushion than the country's three biggest carriers, American Airlines, United Airlines, and Delta Air Lines. Southwest is 64 per cent hedged and Alaska has hedged up to half of their estimated fuel consumption for 2022, the airlines said.
High fuel costs do not always crimp airline profits. Steve Gunning, chief financial officer of IAG, noted that the company managed to hit operating profit margins of 14.4 per cent when the oil price was last at $100 per barrel.
But analysts question whether airlines will be able to pass the costs on to customers at a time of fragile demand outside of peak periods. Higher household energy prices could also damage consumer confidence and spending power.
Raising ticket costs in response to high oil prices will be insufficient for US airlines. They will have to cut capacity during off-peak periods, said Savanthi Syth, a managing director at Raymond James. With demand not fully back, "it is tougher to absorb these kind[s] of fuel shocks", she said.
Another of the new problems are the tit-for-tat flight bans. These have left Russian carrier Aeroflot barred from almost all of European and North American skies, while European airlines are no longer able to take northerly shortcuts across Russia to reach Asia, forcing them to burn more fuel.
Investors wiped out a fifth of Finnair’s market value last week after it warned its flights to Asia were unviable without crossing Russia, prompting them into talks with the government over financial assistance.
"The situation has a considerable impact ... Finnair is currently preparing new traffic and cost savings plans in case the situation prolongs," chief executive Topi Manner said. The airline has since restarted some routes on longer flightpaths.
Asian routes
For many airlines the situation is tempered by the fact that routes to Asia have been the slowest to recover because of travel restrictions in the region.
"The places we fly to over Russian airspace, we are not really serving at the minute, we are able to reroute our network," British Airways boss Sean Doyle said last week.
But beyond the short-term, carriers face longer, more expensive trips to growing markets including China and India. And when markets do reopen, Gulf airlines could have a competitive advantage because of their southerly flight patterns.
Stephen Furlong, an analyst at Davy, said that more popular routes could also be hit with overcapacity if airlines shift resources from Asia. "A decade ago we had profit warnings on transatlantic flights when Asian markets were weak," he said.
The key to future health and the perhaps the biggest unknown is what the war will do to consumer confidence and demand for flying.
Lufthansa and Ryanair both reported a slowdown in ticket sales when the war broke out, although O'Leary hopes it is a temporary blip.
“When conflict arises in the world, we see slower demand. But I cannot quantify that reduction yet,” Spohr said.
Several industry figures recall the first Gulf war in 1990-91, when US tourist numbers to Europe fell because of the region’s relative proximity to the Middle East.
Long haul
In the latest crisis, domestic and short-haul focused airlines are likely to cope best, while long-haul airlines, which suffered the most during the pandemic, are more exposed.
“It is not going to stop Brits going to Malaga this summer, I don’t think. But might Americans not want to go to Berlin, for example?” Furlong said. – Copyright The Financial Times Limited 2022
