Staying at home: Airlines are sounding the alarm over rising fuel prices

International airlines have begun canceling flights and raising airfare prices due to a sharp rise in aviation fuel prices caused by the U.S.-Israeli war in Iran. SAS has already announced the cancellation of more than 100 flights this week, later it became known about the implementation of a similar step in April — we can already talk about at least 1,000 flights. Many airlines are talking about increasing the cost of tickets. For more information about what will happen to international air transportation in the near future, see the Izvestia article.

SAS cancels flights

SAS (Scandinavian Airlines), as reported by NRK (Norwegian State Broadcaster), the head of communications of SAS Norway Oystein Schmidt, cancels more than 100 flights this week. This is due to the high fuel prices that have jumped due to the situation in the Middle East. However, he did not specify for how long flights are canceled, as well as which flights and airports are affected by this measure.

According to NRK estimates, 118 domestic and international flights have been cancelled in Norway alone. It later became known that SAS would also cancel more than 1,000 flights in April.

"The price of aviation fuel has doubled in ten days. Even if we try to offset the price increase as much as possible, it will be a shock that will directly hit the aviation industry," SAS CEO Anko van der Werff told Swedish newspaper Dagens Industri.

He also pointed out that in March, the company had already canceled "a couple hundred" flights, adding that SAS usually performs 800 flights a day, so the measures taken were not drastic.

It is important to note that the company is not only canceling flights, it has already increased the prices of air tickets.

Maxim Fedosov, an expert in the field of transport, aviation and tourism, told Izvestia that the cancellation of SAS flights has a number of factors, one of which is an increase in flight routes.

— As you know, all European companies are prohibited from using Russian airspace for flights on routes between Europe and Asia. They have to fly over a fairly large area, and on average the flight time increases by one and a half to three hours. The increase in flight time also affects the ticket price. But these restrictions have been in effect for almost four years," he explained.

What does this mean for airlines

Oleg Panteleev, head of the analytical service Aviport, in an interview with Izvestia, noted that the likelihood of airlines revising the schedule will increase as fuel prices rise, as well as the impact of global inflation on business activity. He also added that the current situation is incomparable with the COVID-19 pandemic, because then airlines had the opportunity to negotiate with lessors about "holidays" in payments and lower rates. Right now, airlines don't have to talk about discounts from counterparties yet.

— I believe that the current situation, provided that the conflict drags on, can be comparable to the global economic crises of the beginning of the century or 2008. This means both the risks of revising the route network and the risks of carrier bankruptcies," the expert suggested.

Maxim Fedosov pointed out that the cost of air tickets is formed from the following parameters: the cost of jet fuel, lease payments, airline personnel, pilots' salaries, aircraft insurance, and others.

— An increase in the cost of fuel affects the final price of air tickets, but it cannot lead to a strong jump. Nevertheless, it is natural for airlines to raise tariffs when the cost of jet fuel increases. It should be noted that companies usually enter into long-term fuel supply contracts with providers and brokers. Therefore, in most cases, the price is fixed for a long time," the source said.

Oleg Panteleev recalled that there is a concept of price elasticity — by increasing the price, airlines "cut off" some of the customers who cannot afford the new tariffs.

— At some point, the economy of flights will stop converging, then it will be impossible to increase fares, and it will not be possible to fly using existing ones either. It will remain either to close the route, or to take other measures: to reduce the frequency of flights, change the type of aircraft, build partnerships with other airlines, and so on," the expert explained.

He clarified that long-haul flights are more sensitive to fuel prices. In the cost structure on long routes, it is in the first place in terms of costs.

— Low-cost airlines will be more affected not by rising kerosene prices, but by a decrease in business activity and inflation in general. A significant part of their business is the transportation of migrant workers and holiday travelers. These audiences are the most sensitive to macroeconomic indicators," Panteleev said.

The duration of the conflict in the Middle East is also important, according to the analyst. Previous shocks in the region were relatively short-term, so their impact on global civil aviation was minimal. Now the situation is different.

— If the matter is limited to a surge in prices for oil and petroleum products, and then the situation normalizes, then the aviation market will return to its usual course relatively quickly. But there are risks of escalation of the conflict and its prolongation. If this provokes a global economic crisis, the aviation industry will have a very difficult time. She has just recovered from the pandemic, from the redesign of route networks after the introduction of anti-Russian sanctions. Another blow could be fatal for a number of carriers," Oleg Panteleev summed up.

Will it affect Russia

Maxim Fedosov drew attention to the fact that for Russian airlines, an increase in the cost of jet fuel is also an issue that requires certain actions on the part of air carriers, adding that the cost of flights on international flights may be slightly increased.

For security reasons, Russia canceled flights to the Middle East, but increased the number of flights to other destinations — Thailand, Maldives, Vietnam. At the moment, about 40 countries with direct flights are open to Russians, the agency's interlocutor recalled.

Everyone is suffering

The conflict in the Middle East and the blocking of the Strait of Hormuz have affected not only SAS, but also airlines around the world. Delta Air Lines CEO Ed Bastian said the increase in fuel costs led to a $400 million increase in airline costs in March. At the same time, according to him, the industry is rapidly moving to shift the increased costs to consumers by increasing ticket prices.

The growing number of warnings about rising ticket prices shows that the effects of the conflict in the Middle East are spreading far beyond the region. At the same time, airlines are experiencing the largest crisis since the COVID-19 pandemic and they need to be careful when raising ticket prices so as not to lose consumer confidence.

What actions are airlines taking due to rising fuel prices:

— Air France-KLM. An airline representative announced last week that the cost of economy class tickets will increase by €50 ($57.63) for round-trip flights.;

— Air India and Air India Express. The companies announced the phased introduction of fuel charges for domestic and international flights. They will increase from $60 to $90 to Africa, from $40 to $60 to Southeast Asia, and a surcharge of 399 rupees (about $4.3) for domestic and a number of other destinations. Starting March 18, the fee to Europe will increase by $25 ($125), and to North America and Australia — by $50 ($200);

— Cathay Pacific. Starting from March 18, the company doubles the fuel tax. For long-haul flights, it will amount to 1,164 Hong Kong dollars ($149) instead of 569.