BusinessConcerns As Rising Jet Fuel Prices Mar Airlines’ Financial Recovery

Concerns As Rising Jet Fuel Prices Mar Airlines’ Financial Recovery

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November 14, (THEWILL) – Fuel presents a diverse role as airlines strive to recover from the devastating impact of the COVID-19 pandemic.

The price of jet fuel has continued to trend upwards in recent weeks with economic activity restarting around the world and supply remains tight. As of early November, jet fuel price was 70 percent higher against the start of the year.

Consequently, airline stocks have trickled down in October amid concerns about the impact of rising jet fuel prices on airlines’ operating costs. The fall was broad-based across all region, and was the most significant in North America.

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The International Air Transport Association (IATA) in its Airlines Financial Monitor released recently stated that initial Q3 2021 results show that financial losses of airlines at the aggregated level diminished, compared with Q2 2021, with some carriers reporting their first profitable quarter since the crisis started.

In the sample of 27 airlines, the industry-wide Earnings Before Interest and Taxes (EBIT) margin improved to -2 percent of revenues in Q3. The improvement, according to IATA, has been driven by passenger travel recovery on some domestic and short-haul routes where travel restrictions were lifted during the traditionally busy Q3.

However, some airlines were amongst the best performers, benefitting from the traffic in the US domestic market, despite a negative impact from the outbreak of COVID-19 between August and September. The US airlines’ bottom line was also boosted by a government payroll-support programme.

European carriers also recorded a robust recovery on the back of rising intra-European traffic. However, a sharp increase in jet fuel price has been putting an upward pressure on airlines’ operating costs and this represents a risk to a further recovery in the industry’s profitability during Q4.

In terms of changes in the cost of jet fuel, it has been noticed that average monthly jet fuel price and Brent crude oil price have continued to climb higher in recent weeks and they are currently well above pre-crisis 2019 levels.

For example, at the beginning of November, the price per barrel of jet fuel was at US$96.1, +70 percent. The price increase has been driven by swiftly recovering demand as markets reopen around the world and economic activity restarts. Meanwhile, supply has remained tight since an increase in OPEC production has been slow.

In the same vein, reports have shown that the global airline share price index has been trending sideways at well below pre-pandemic levels throughout most of 2021 amidst uncertainty about pandemic outbreaks and their impact on the air travel recovery.

According to the Airlines Financial Monitor released by IATA, the metric rose by only 1.8 percent year-to-date, compared with a 15.2 percent increase in wider equity markets over the same period.

Amongst the regions, European airlines have on average the weakest share price performance. However, IATA pointed out that airlines’ financial positions improved in Q3, while cost pressures are rising. Emphasing further, the association observed that operating revenues continue to fall faster than operating costs.

While initial financial results indicate that passenger revenues declined by 34 percent in Q3 2021, compared with the pre-crisis Q3 2019, cargo revenues rose by 65 percent over the same period amidst robust cargo demand.

“Total airline revenues went down by 30 percent; a robust improvement on the 46 percent decline in Q2. The fall in operating costs in our airline sample was lower than the fall in revenues, at -18 percent. The rising fuel prices increased pressure on fuel costs (down 27 percent in Q3 2021 vs -45 percent in Q2 2021). However, other variable costs have also been rapidly returning with the traffic restart”, IATA stated.

Meanwhile, how the various factors affecting fuel will play out as the industry returns to normal is difficult to ascertain. Fuel has always been a significant cost for airlines. But the pandemic and subsequent recovery has blurred the picture as digitalization, new aircraft, and environmental mitigation, both mandated and voluntary, add new pressures to supply and demand.

About the Author

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Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.

Sam Diala, THEWILLhttps://thewillnews.com
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.

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