After being pummeled by a dramatic decrease in travel demand due to the pandemic, the airline industry is now facing a new challenge in the form of skyrocketing jet fuel prices. With the war in Ukraine affecting oil imports from Russia, jet fuel prices have now risen to levels not seen in over a decade.
The surge in jet fuel prices has sent airline and travel-related stocks plummeting. The war in Ukraine has not only upended global markets but has also sparked a growing concern around fuel supplies. Since the beginning of the year, fuel prices have surged by more than 50%, owing to the crisis in Ukraine, the prolonged pandemic, and continued supply chain disruptions.
Airlines in the U.S. are already expected to downgrade their upcoming quarterly earnings forecasts in the coming weeks, given the recent surge. Fuel prices rose by around 32% over the past week. Fuel costs are generally the second-largest expense for airlines, right behind labor costs.
MKM Partners airline analyst Conor Cunningham said rising fuel prices would wipe out most airlines' revenues in the near term, which will result in reduced first and second-quarter profit and revenue estimates.
As they try to entice consumers back to the sky, airlines are constrained in how much capacity they can cut to hike rates. Domestic schedules in the United States remained unchanged in the second quarter of 2019 compared to the previous year. Given the increasing competition, analysts believe airlines will not decrease capacity too much.
As markets were thrown into chaos by Russia's sudden incursion into Ukraine, airline stocks have been among the most affected. On Monday, the NYSE Arca Airline Index, which measures 18 airlines, fell more than 13%. United Airlines' stock dropped 15% on the same day, closing at $31.20 per share, its lowest level since July 2020. Delta Air Lines plunged over 13% to $30.11 per share, while American Airlines sank 12% to $12.84 per share.
Airline analysts said it might take a few months before ticket prices increase due to the fuel price hike. Analysts added that it might take around four months before ticket prices catch up.
After oil prices rose and then crashed in 2014, some major US airlines, such as American Airlines, abandoned fuel hedging. The fuel price collapse fueled a decade of airline profitability in the United States, which was finally shattered by the coronavirus in 2020. Analysts said airlines that are not hedging fuel prices may suffer the most, particularly as prices are now at their highest level.
