Why planes are becoming more expensive due to rising jet fuel prices

Fuel prices have soared since the US and Israel attacked Iran about two weeks ago, and airfares are already rising. Consumers’ desire to travel this year will likely determine how much.

Cathay Pacific Airways announced on Thursday that it will nearly double the fuel surcharge on its tickets from March 18th.

Earlier this week, Australia’s Qantas Airways announced it would increase fares to cover costs, Scandinavian Airlines said “unusually rapid and significant increases” in fuel had prompted the increase, and Air New Zealand added that it had lowered its financial outlook and made “initial fare adjustments” “until fuel markets and operational conditions stabilize”.

“If jet fuel costs continue to rise as a result of the conflict, airlines may need to take further pricing measures and adjust their networks and schedules as necessary,” Air New Zealand said.

U.S. airline CEOs and other executives will update investors at the JPMorgan Industrials Conference in Washington, D.C. on Tuesday

Analysts expect profits to take a hit at least in the first quarter of the year, if not the first half of the year, but the impact will depend on how long fuel price hikes persist.

“We believe a first-quarter EPS hit is almost certain at this point,” UBS aviation analysts Atul Maheswari and Thomas Wadewicz wrote in a note last week.

united airlines CEO Scott Kirby said last week on the sidelines of an event at Harvard University that rising fuel prices would likely lead to fare increases.

But Mr Kirby said demand for travel remained strong. Two other senior executives at U.S. airlines also said on condition of anonymity because they were not authorized to speak to the media that travel demand was holding up. If these trends continue, airlines could be given more pricing power, but that would depend on the duration of the war.

“Airlines never accepted high fares they didn’t want,” said Scott Keyes, founder of Going Airline (formerly known as Scott’s Cheap Flights).

So what’s a consumer to do?

Keyes said there’s nothing wrong with travelers booking early, as long as they don’t buy basic economy tickets, which have restrictions. That way, if airfares drop, customers can try exchanging or canceling their tickets and purchase cheaper tickets.

“If you book a $500 summer ticket today and the price drops to $350 two weeks later, you can call the airline and get the $150 difference back as a credit. Heads win, tails the airline loses,” he said.

Jet fuel is the biggest cost for airlines after personnel, accounting for about one-fifth or more of their expenses, depending on the airline.

United Airlines alone spent $11.4 billion on fuel last year, with an average price of $2.44 per gallon, according to the company’s securities filings. U.S. jet fuel prices were $3.78 per gallon on Wednesday, Platts said.

Sheila Kahyaoglu, an airline analyst at Jefferies, said in a note Thursday that she expects “the most severe financial impact on airlines from higher oil prices will be in the next 30 to 90 days as airlines lock in yield on near-term flights based on significantly lower fuel prices and the inability of airlines to raise fares retroactively.”

she said delta airlines United Airlines, which generates most of the profits for U.S. airlines, is in a better position than other airlines because of the demand for luxury goods. Risks to demand, particularly for price-sensitive customers, include recent increases in gasoline prices.

Since the United States and Israel first attacked Iran on February 28, jet fuel has more than doubled in some regions.

After the first strike, oil prices rose to their highest level in nearly four years. Since then, energy prices have fluctuated wildly as traders assess how long the war and all its logistical headaches will last.

U.S. jet fuel prices have risen more than 60% since before the attacks, reaching a peak last week, according to price data assessed by Platts. Jet fuel could be much more expensive than crude oil because it involves processing costs and ever-more difficult and expensive transportation from the field to the refinery to the plane’s fuel tank.

On February 27, the day before the attack, the cost of filling up the fuel tank was incurred. boeing The 737-800 would have cost about $17,000, based on average prices for New York, Houston, Chicago and Los Angeles compiled by the Argus. Less than a week later, on March 5, it would have cost more than $27,000 based on Argus prices. Oil should have cost about $23,000 on Tuesday, as oil prices fell following President Donald Trump’s remarks that the Iran war could end “soon.”

Previous fuel price hikes have led airlines to make customers pay for baggage or charge additional fees. Even seemingly small changes in weight can save airlines hundreds of thousands, if not millions, of dollars in fuel annually. In 2018, United Airlines changed the paper quality of its in-flight magazines to lighter-weight paper. In 2014, american airlines The company announced that it will switch to a digital manual for flight attendants due to a change in pilots. At the time, it was announced that it would save $650,000 in fuel costs per year.

Higher fuel prices do not automatically mean higher fares. Continued strong demand for travel is a key factor, as is airline capacity, or volume.

If airlines raise fares and passengers become hesitant, in more serious cases, there is a strong possibility that transportation capacity will decline in the form of fewer or significantly fewer flights on routes.

“Airlines like to say fuel is expensive and you have to pay more. What they’re doing is setting expectations,” said Courtney Miller, founder of Visual Approach Analytics, an airline industry advisory firm. “They set prices to prevent empty seats.”

When fuel prices go down, “they don’t suddenly say, ‘Oh, I’m making too much money,'” Miller added. “But they may add another flight.”

Airspace closures and other flights have limited capacity, particularly to and from the Middle East. More than 46,000 flights to and from the region have been canceled since the attacks began on February 28, according to aviation data firm Cirium.

United’s Mr. Kirby said those constraints are driving up not only fares but also demand from regions where customers are looking for alternative routes.

Airspace closures are forcing airlines to take longer, more fuel-intensive routes, but many are also in strong demand.

Qantas, for example, told CNBC that its flight from Perth, Australia, to London briefly stopped in Singapore for refueling so it could carry an additional 60 passengers, and that its Perth-London and Perth-Paris routes this month were more than 90% full, 15 percentage points higher than normal for this time of year.

Finnair said prices rose by an average of 15% due to increased demand for travel from Helsinki to Asia.

“Airlines typically hedge at least a portion of their fuel purchases, so the impact of higher fuel prices will be reflected in market fares with a delay,” it said.

Airlines have long suffered from airspace closures, including from intermittent conflicts in the Middle East and since Russia’s invasion of Ukraine in 2022, leaving many airlines unable to use large swathes of airspace.

Most U.S. airlines do not hedge their fuel costs or use futures or other securities to lock in prices. southwest airlines was one of the last remaining holdouts and withdrew last year. A spokesperson for the Dallas-based airline told CNBC that Southwest Airlines has “no plans” to resume hedging at this time.

This makes U.S. carriers more susceptible to price fluctuations.

Mr. Kirby said that if the war and the closure of the Strait of Hormuz, a major sea route, were to drag on, United’s first and second quarter results would likely be affected. But he said demand is surging from the Middle East, a region affected by thousands of flight cancellations and airspace closures.

Airlines’ positive demand outlook for the start of the year “makes it easier to pass on fare increases. Furthermore, if jet fuel prices remain high for an extended period of time, this could lead to a decline in off-peak availability,” analysts at UBS said, supporting unit earnings.

“Jet fuel demand is inelastic. You can’t change airports on the fly. Even if the cost of jet fuel goes up, it doesn’t mean planes will choose not to fly that day,” Rick Joswick, head of short-term oil research and analysis at S&P Global Energy, told CNBC.

“We can’t run the airport dry,” he said.