Industry braces for impact of oil price increases on tariffs

The confluence of the apparent recovery from the Covid-19 pandemic with the Russian invasion of Ukraine has pushed up the oil price. The result of this is that the airline industry is, at least for the time being, sailing in uncharted waters.

In general, airlines are able to recoup most of the rise in fuel prices by raising fares. However, the current situation seems unprecedented for what the industry has experienced. As reported by Skift, United Airlines CFO Gerry Laderman said during the ISTAT Americas conference in San Diego, California, that «there really is no precedent for what is currently happening.»

Normally, airlines pass on about 60% of fuel price increases to fares, absorbing the remainder. However, a myriad of successive crises has impacted the industry. «I’m not able to predict whether that will happen again», he said. United treasurer Pam Hendry added that oil price increases «generally take about a quarter» to impact fares.

Raising prices

The price of Brent crude, the global oil benchmark, has risen about 25% since the beginning of the year. On March 7, the record high was reached at the time the asset traded in the vicinity of $130 per barrel. «The next few months will be worrying from a financial point of view, however strong the traffic recovery is,» said Helane Becker, an analyst at Cowen & Co. Besides raising prices, the other tool in airlines’ toolbox is to slice operations: reducing frequencies or eliminating destinations from their network.

Thanks to the widespread practice of fuel hedging,( a contract in which airlines and oil companies agree in advance and for a certain price to provide fuel for a certain period of time), European companies have greater predictability in fuel supply. Therefore this makes them less susceptible to short-term rises in oil prices.