The US-Iran war continues to impact the Middle East and wider airline industry. A drone attack on Dubai airport caused a fire earlier today that caused several flights to return to their origin airports, with others diverted to Al Maktoum International airport. Although the fire is reported to have quickly been brought under control, passengers have been told to avoid the airport until further notice.
Oil prices are continuing to rise today. Brent crude climbed three per cent to $106.50 a barrel in early morning trading before easing back to $105.42. Jet fuel prices have jumped even faster than crude, in some cases reaching $150–$200 per barrel equivalent in spot markets. The energy crisis is likely to continue despite President Trump’s call for aid to open the Strait of Hormuz, which would take time to organise if his call were heeded.
Analysis from JPMorgan said that the disruption to the oil supply was feeding directly into airfares. ‘NWE diesel rose from $100 to $140/bbl and NWE jet fuel from $100 to $175/bbl, with airlines passing costs through—Air France KLM added €50 to economy round trips from Mar 11, SAS introduced a temporary surcharge, Cathay Pacific plans to double surcharges from Mar 18, and Air India/Air India Express are adding charges through early April,’ reported Gui Mendes and Julia Orsi on March 13. The team’s jet fuel sensitivity analysis showed that ‘for every 10% increase in oil prices, EBITDA(R) would decline by approximately 7-11% on average for the companies under our coverage, all else equal’.
Although airlines can and are passing on the fuel price rise into their airfares, the longer the crisis continues, the heavier the stress test for the world’s carriers. Fuel shocks often trigger airline failures – airline bankruptcies followed the 1970s oil crises and the 2008 oil spike. Although the market is in a very different place operationally, sustained high oil costs will put pressure on an industry that has been enjoying a relatively benign period of higher air fares due to aircraft capacity constraints, with relatively low global disruption. That environment has translated into several profitable quarters for many airlines.
Airline profitability remains wafer-thin and many carriers are only now emerging from an intense period of restructuring and reorganisation following the global pandemic. For those airlines still rebuilding their balance sheets, the current fuel shock creates an immediate stress test.
Spirit Airlines’ restructuring may be a litmus test for the industry. The carrier published its reorganisation plan over the weekend that will shrink its fleet and refocus on core markets with premium seating in a nod to the current trend. A smaller fleet and reduced debt burden will assist the airline to continue with operations but the plan makes no mention of fuel cost management nor any expectation that passenger demand may soften as fares increase and energy costs hit disposable incomes.
Two weeks into the crisis is too soon to make firm predictions but the question remains: how long can Spirit, or other weaker airlines, survive while oil remains above $100 a barrel?
Fuel costs are not addressed directly in Spirit’s restructuring plan, but they hover over it nonetheless. The airline can renegotiate debt, leases and labour contracts in bankruptcy court, but it cannot restructure the price of jet fuel. The viability of Spirit’s post-bankruptcy business plan may ultimately be decided not by creditors or judges, but by global energy markets. If crude remains above $100 a barrel, the ultra-low-cost model faces a brutal reality: the cheapest fares in America may simply not cover the cost of flying.