As the war with Iran drags on and international oil prices trend higher, airlines are growing more concerned. The longer high oil prices persist, the more their profitability is bound to deteriorate.
On the 15th, local time, CNN reported, "As the war with Iran continues, oil prices are surging and airlines will face higher fuel costs," adding, "This could also strain the wallets of travelers worldwide."
After U.S. and Israeli strikes on Iran, crude prices have jumped and are now fluctuating around $100 per barrel (about 150,000 won). That is about a 40% increase compared with before the war began. With the spike in international oil prices, the average Singapore jet fuel price (MOPS) for Feb. 16 to Mar. 15 this year, which serves as the baseline for next month's fuel surcharges, is expected to rise to at least 300 cents per gallon (3.785L).
United Airlines Chief Executive Officer Scott Kirby said in a CNBC interview last week that oil price volatility could have a "significant" impact on United's next-quarter financial results. He also said, "If this trend continues, it will affect the second quarter as well."
An airline's biggest expenses are labor and jet fuel. Depending on international oil prices, jet fuel accounts for 20% to 30% of an airline's total expenses. Rob Britton, a former American Airlines executive and an adjunct professor of marketing at Georgetown University's McDonough School of Business, said, "If fuel prices remain elevated, fares will rise," adding, "Even a simple calculation suggests ticket prices will increase in proportion to fuel prices."
Domestic airfares at major U.S. airlines have already soared. According to The Wall Street Journal (WSJ), as of the 13th, the lowest posted one-way domestic fare at U.S. low-cost carrier Spirit Airlines was $193 (about 290,000 won). That is more than double the level from the previous week. Advance-purchase domestic fares at full-service carriers United Airlines and Delta Air Lines also rose at least 15% and as much as 57% over the same period, the report was found.
However, it may take time for the recent oil price increases to be fully reflected in airfares. Airfares are determined by a range of factors beyond fuel costs or the operating expenses of a specific flight. In addition, if travel demand falls due to inflation, airlines may find it difficult to raise fares by as much as their expenses rise.
In its annual report last year, Southwest Airlines said, "Fuel and oil are highly volatile and difficult to forecast, and even small changes in market fuel prices can have a significant impact on profitability." It continued, "Passengers typically purchase tickets well in advance of travel," adding, "As a result, even if the company raises fares or imposes fuel surcharges and cuts other operating expenses, it may not be able to offset sharp or prolonged increases in fuel prices."
Even if higher fuel costs do not immediately show up as a direct expense burden on passengers, they are likely to have another impact through airlines' route reductions. Airlines may reconsider whether to continue operating certain routes that were profitable when fuel costs were low but have become less profitable now. If the number of flights available to passengers shrinks, the reduction in ticket supply itself could drive fares higher, CNN noted.
Zach Griff of the airline newsletter "From the Wing Table" said, "Airlines will have to manage expenses very closely if they want to generate revenue this summer," adding, "Flights with low profitability will definitely be on the chopping block." Airlines have already slashed many Middle East-bound flights due to the war's fallout. According to aviation analytics firm Cirium, about 50,000 flights have been canceled since the war began.