October 7, 2022
Airlines Maneuver Financially amid Rising Oil Prices

Airlines Maneuver Financially amid Rising Oil Prices

DALLAS – Due to the current crisis in Ukraine, the price of oil has spiked, reaching a 14-year peak in some countries and impacting jet fuel prices profoundly.

In many countries, oil prices were already on the rise before the Ukraine invasion began to take hold of the world. However, with the recent developments in the country and subsequent global sanctions against Russia, oil prices have now reached new heights.

Russia is a major oil producer, and sanctions include a ban on Russian oil imports, which affects oil prices globally. Therefore, IATA and the aviation industry as a whole are concerned as they see the price of oil rise to levels not seen since 2008.

However, many airlines have a safety net against changing jet fuel prices; carriers often choose to hedge a part of their fuel costs. Hedging means airlines paying all their fuel at the same price for a given year or fiscal quarter, with an insurer paying any price difference. If the fuel price is lower, the airline pays the remaining amount to the insurer.

Hedging is therefore a strategy for airlines to reduce their exposure to volatile oil prices. However, some carriers choose not to hedge their fuel. Indeed, it could be a bad decision for airlines to do so if oil prices go down, and yet, not hedging offers less security as airlines cannot adjust their ticket prices soon enough to compensate for any changing fuel costs.

According to Reuters, major European airlines, such as Air France (AF), Lufthansa (LH), or British Airways (BA), each hedged more than 60% of their fuel at the beginning of the year. However, major US airlines, including United Airlines (UA), American Airlines (AA), and Delta Air Lines (DL), did not hedge their fuel in 2022, though it is worth mentioning that DL owns its own oil refinery.

Airlines in the US are less impacted because there were almost no oil imports from Russia before the crisis. Photo: Luca Flores/Airways

Airlines in Nigeria Face Backruptcy

At a Parliament hearing this week in Nigeria, operators explained the issues concerning rising fuel prices. At the hearing, Allen Onyeama, chairman of Air Peace (P4), represented his country’s airline operators. He first explained that oil prices were more than three times higher than prices at the end of 2021.

Onyeama said, “If the prices of aviation fuel keep rising at the rate they are moving, we are not sure we will survive the next 72 hours.” He then made a request to lower prices to about the same price as the one at the end of last year. However, if the request is granted, it means the government has to subsidize jet fuel, which would cost a lot.

Air Peace’s chairman also said some flights had to be canceled or delayed due to fuel shortages. While Nigeria is an important oil producer, it only has a small amount of refinery capacity, which explains the shortage in the African country.

While airlines have gradually recovered from the fallout of the pandemic, they now face operational issues stemming from fuel price hikes worldwide. Some countries will be more impacted than others, but overall, the situation can have an impact on ticket prices in the near term, as airlines will try to maintain their financial stability.

According to IATA, the jet fuel price reached US$141/bbl last week, and its average for 2022 (year to date) is at US$110.2/bbl

Table: IATA

Featured image: Ocean Hoevet/Airways

Aviation enthusiast and private pilot student, I am fascinated by the aviation industry.

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