Soaring fuel prices a concern for the aviation industry

As travel starts to take off again, and the industry begins its recovery following a difficult couple of years, the aviation sector has been hit with another blow – dramatically increasing fuel prices. How will these fuel prices affect the industry and can anything be done to mitigate them?

John Cotter, professor in finance and the chair in quantitative finance at University College Dublin says that jet fuel prices were less than $20 a barrel two years ago, but now are eight times higher. “It’s a supply and demand issue. We have had in the last three years very close to zero demand. Fast forward two years and we have increased demand and a situation where the supply of oil is affected by the war in Ukraine – now prices are in excess of $150 a barrel.”

Global economic uncertainties and fluctuating oil demand and production are driving oil prices, agrees Dr Marina Efthymiou, course director for the MSc in aviation leadership, and assistant professor in aviation management, at DCU business school. “The Russian invasion of Ukraine is also driving the fuel cost and the airspace closures make routes longer, meaning that they need to burn more fuel. For example, a flight from Helsinki to/from Seoul is 2,150NM longer due to the Russian airspace closure.”

In addition, the US banned all Russian oil and gas imports, and the UK decided to phase out Russian oil by 2022. “The EU stated that they will switch to alternative suppliers and become independent from Russian energy by 2030. On March 4th, jet fuel prices rose to $141 per barrel, up 27 per cent on the month. On April 14th, jet fuel was at $160 per barrel, 14.3 per cent higher than a month earlier and 126.2 per cent higher year on year.”

Oil prices

Cotter believes that while a shortage in supply affects oil prices, the bigger concern is volatility in oil prices. “We’ve seen very large swings over the last two to three years, which is more of a fundamental challenge to the industry because it hedges against oil price uncertainty and has to do that more now than it did two or three years ago.

Dr Efthymiou agrees. “The most worrying part for the aviation industry is uncertainty. It is unknown for how long the prices will keep rising and there are many disruptions in the industry posing threats to all carriers, especially the smaller carriers. It will be interesting to observe how the fossil fuel cost increase will affect the demand for sustainable aviation fuel.”

Fuel accounts for about 30 per cent to 35 per cent of the total operating cost for an airline, and it is a cost which impacts the ticket price, says Dr Efthymiou. “Airlines are still trying to cut losses as they emerge from the pandemic, and a significant and long-lasting increase in their operating cost will soon be reflected in fares and the yields.”

Cotter says that eventually, these rising costs will be passed on to customers. “Costs have increased so fares have to be increased to match. It will introduce discrepancies across the industry and long-haul flights will be more impacted than short-haul flights.”

Making the whole industry more efficient, whether that’s via using sustainable aviation fuel and improving technologies so planes fly more efficiently and maximise the fuel they use are a couple of ways to mitigate the sky-rocketing costs, says Cotter.