The No. 1 threat to the airline industry’s recovery appears to have switched from Covid worries to rising oil prices, exacerbated by Russia’s invasion of Ukraine. Experts say airfares are likely to rise — but perhaps with some restraint by the carriers.
Oil prices briefly topped $100 a barrel Thursday, the first time they’ve hit that mark since 2014, before falling back slightly. It has been a steep climb from 2020’s average of about $39 a barrel.
So far, the pace of travel has not slowed, according to the Transportation Security Administration’s tracking of checkpoint clearances, and the pace of fare increases has not soared, at least through last week.
On Thursday, TSA reported that 1.98 million people cleared security at U.S. airports. The five days of travel around the Presidents Day weekend included four with more than 2 million clearances, including 2.24 million on Friday Feb. 18. That was the heaviest day since Nov. 28, 2021, the Sunday after Thanksgiving.
Meanwhile, Cowen analyst Helane Becker wrote in a report Monday that as of Feb. 14, published fares were up 5.7% from a week earlier and 6.3% from a year earlier. Becker noted that actual sale fares, which are demand-based, tend to be lower than published fares. Travel booking app Hopper said Tuesday that domestic prices for spring break, between March 7 and March 21, were down 6% from 2019.
Still, Stephen Beck, founder of management consulting firm cg42, said the carriers are in a bad spot, facing cost increases not only for fuel but for many other expenses including labor. Every major carrier is engaged in pilot contract talks.
“Airlines as an industry have a big choice in front of them: more debt or passing costs on to customers,” Beck said. “They really have to balance how they pass the costs on versus how they stimulate the recovery.
“The current base of travelers is very price sensitive,” Beck said.
Aviation consultant Bob Mann said, “Airlines have pivoted to rely on leisure air travel demand, and are less likely to see non-business travel absorb $3/gallon fuel prices [for aviation fuel].
“Thus, in addition to war and sanctions-related questions surrounding demand for summer international travel, overall demand may decline,” Mann said.
On fourth-quarter earnings calls in January, executives generally predicted busy spring and summer travel, stimulated by pent-up demand including recovering business travel demand, which had been forestalled by the fast spread of the Omicron variant.
“No doubt there is pent-up demand,” Beck said. “But also, there is no doubt that folks are much more wary of the [flight] experience, and continue to think through what is the best manner to get from where I am to where I want to be.”
He said business travel could have been permanently diminished by the increase use of visual communications technologies such as Zoom. He said consulting firms like his will still provide “the big deliverables, the big senior management sessions, in person,” but no longer will engage in “the takeover of the conference room, Monday through Friday, just to be there.”
Theoretically, as fuel prices rise, the airlines that suffer the least impact would be the ones with the youngest fleets – although airlines always have the option to reduce flying by their oldest aircraft.
“The best hedged airlines have the most modern, most fuel-efficiently engineered fleets, narrowbody Airbus neos and Boeing Maxes, and their widebody counterparts,” Mann said. During the recession, carriers generally abandoned the practice of speculating in fuel hedging.
In fleet age, American leads the major U.S. airlines: the average age of its mainline fleet is 11.3 years.
Average mainline fleet ages include 13 years for Southwest, 13.9 years for Delta and 16.5 years for United, according to company spokespersons. Among low-cost carriers, Frontier and Spirit fleets average four to five years, while Alaska is around eight years.
