It’s that time of year again when out-of-office messages flood our inboxes from workers on a rejuvenating summer escape. Airlines have been working hard to avoid disrupting holiday plans and have had to make several adjustments to cope with higher global jet fuel prices, unforeseen airline and airport strikes, staff shortages, and having to reroute flight paths in the wake of geopolitical tensions and airspace sanctions from both the EU and Russia.
Taking longer routes automatically results in expending more jet fuel for airlines on both sides. Although the International Civil Aviation Organisation recently condemned Russia’s violation of international aviation rules by “illegally double-registering in Russia aircraft stolen from leasing companies and permitting Russian airlines to [still] operate these aircraft on international routes.”
The European Union is determined to drastically reduce energy dependence on Russia with a ban on almost 90% of Russian imports expected to take effect in 2023. In the meantime, EU energy ministers have reached a political agreement to reduce natural gas demand by 15% this winter. Fitch Solutions in an article expressed that it is unlikely that Russia will fully cut gas supplies to Europe in winter as it would mean the “loss of crucial leverage over the European Union.”
But compared to natural gas, Europe is less dependent on Russian jet fuel imports. S&P Global estimates Europe's imports of jet fuel from Russia at just 10,000 barrels per day between January and April. They add that general jet fuel demand from Europe plummeted to 25% below pre-pandemic levels following staff shortages experienced in European airports, although it was between 70,000 barrels per day between March and April. While demand may have fallen in the short-term, jet-fuel prices have maintained their global high average compared to preceding years.
International air transport association IATA as of 5 August 2022 put the price of jet fuel at $128 per barrel and $1043 per metric tonne. This is around 10% lesser than it was sold for in the preceding weeks, but still 71% more than the price a year ago in Europe.
Hedging contracts and price forecasts show gains will persist
Fuel is the second-largest expense for most aircrafts with the most popular fuels for commercial aviation being Jet A and Jet A-1, which is derived from crude oil. Most European airlines have already hedged their fuel prices well in advance, but continuous fluctuations may come at a higher cost for some airlines depending on the hedging strategy in place, as some airlines may be much more prepared to cope with a sustained jet fuel price surge.
The European Regions Airline Association (ERA) already criticised the lowering of flight costs by certain low-cost carriers below operational prices as “irresponsible”, saying that it creates unfair competition and impacts the single European market.
Delano spoke to airline operators to estimate their preparedness in dealing with a sustained surge in jet fuel prices, and what this could mean for passengers in the short and mid-term.
National carrier Luxair explains that "although the entire aviation and tourism industry is currently facing price increases at all levels, Luxair is doing its best to maintain prices in line with its high level of service and excellence throughout the year,” adding that Luxair and its tour operator LuxairTours haven’t noticed “any major impact on its bookings and even recorded an increase in bookings for the summer of 2022.” Luxair CEO reassured passengers in a tweet that the prices of booked tickets will not be changed.
Senior public relations manager at EasyJet Holly Mitchell says that the airline is “well positioned with 83% hedged for fuel in Q4 of FY22 at c.$705 per metric tonne, c.60% hedged for fuel in H1 of FY23 at c.$784 per metric tonne and c. 33% hedged for fuel in H2 of FY23 at c.$879 per metric tonne…. This provides us with a good level of certainty on pricing, while also providing flexibility should fuel prices continue to come down,” Mitchell says. “We will also continue to ensure we offer good value and remain competitive, as our hedging leaves us in a better position than many of our competitors.”
CEO of Ryanair Michael O’Leary had told Bloomberg in March that the airline had hedged 80% of jet fuel supplies at $63 a barrel until March 2023 and is hedged at 9% of the anticipated fuel required for the summer of 2023 at $74 a barrel.
The Lufthansa Group comprising of German airlines Lufthansa and SWISS, Austrian Airlines and Brussels Airlines, published an operating profit of €393 million for the second quarter of 2022 in its mid-year report published on 4 August--indicating less impact on its margins from current fuel prices. It intends to hire 5,000 new employees by the end of the year. Lufthansa Group is reported to have hedged 64% of their estimated jet fuel needs at $74 per barrel for 2022 and 19 percent of 2023 costs, according to Eurofinance.
Fitch Solutions in its recent report in August estimates that prices will average at $105 per barrel this year and $100 per barrel in 2023, similar to predictions by Platts Analytics, which expects prices to remain around $106 per barrel for 2022 and $90 per barrel next year.
Clean Aviation: from fossil fuels to electric and hydrogen-powered planes
The EU’s plan to increase the share of sustainable aviation fuels (SAF) will undoubtedly mark the industry’s fuel consumption choices and margins. Trilogues that will determine the SAF targets for the industry are expected to begin in September with the European Commission proposing a target of 63% by 2050 and the European Parliament pushing for 37% SAF share from 2040 and 85% by 2050.
SAF is more expensive than conventional fuels but could leave up to 80% less carbon emissions. More than 35 European countries and 146 aviation industry stakeholders signed the Toulouse Declaration in February in view of the transition to reach net-zero emissions by 2050. Airbus, ATR, Air France-KLM, Dassault Aviation, Groupe ADP, Safran and Thales welcomed the transition in a joint declaration but called for commitments taken by the European Union to be adopted globally to accelerate decarbonisation efforts.
The Lufthansa Group recently introduced a separate ‘green fare’ for CO2-neutral flying with SAF. “As of now, we are offering a dedicated ‘green fare’ for the first time, which already includes the complete offsetting of the flight's CO2 emissions through sustainable aviation fuel and certified climate protection projects, already embedded in the price. People don't just want to fly and discover the world - they also want to protect it,” said its executive board member Christina Foerster in a press statement. The group has also signed an MoU with Shell to supply SAF up to 1.8 million metric tons for the years 2024-2030.
Lux-Airport in March acquired a shareholding in industry consortium headquartered in Norway, Norsk e-Fuel, to drive the development of e-Fuel production from renewable electricity and air captured from Co2 and water. The start of production in its first facility is planned for 2024.
Travel management company CWT anticipates an 8.4% rise in 2023 business travel airfares, while international financial services provider Allianz predicts a “price war” for European airlines augmented by SAF requirements that could damage airline margins and increase fuelling costs by +57%.