Airline chiefs grapple with fuel shock, fare test at Rio summit

RIO DE JANEIRO: Global airline chiefs open their annual summit in Rio de Janeiro on Saturday (Jun 6) facing a sharper test of the industry's post-pandemic recovery, as the Iran war drives up fuel costs and disrupts airspace while carriers try to cushion the blow with higher fares and tighter capacity.

The Jun 6 to Jun 8 annual meeting of the International Air Transport Association (IATA) comes as that fuel shock collides with another problem airlines cannot quickly fix: a shortage of new aircraft.

Boeing and Airbus delivery delays have forced many carriers to keep older, less fuel-efficient jets in service for longer, raising maintenance and fuel bills just as oil prices have climbed.

IATA, which represents more than 370 airlines accounting for about 85 per cent of global air traffic, had forecast a record US$41 billion in net profit this year for the industry before the war. Industry executives and analysts expect that outlook to be lowered at the meeting.

A Deloitte survey of 21 global airline CEOs published this week found that fuel price volatility and inflation sit at the top of the industry's risk agenda, pushing carriers to focus more heavily on cost control and financial health.

"Together, they've turned what was supposed to be a record year into a fight for margin," the survey said.

Brazilian airline Azul is planning to trim more flights to meet demand due to higher jet fuel prices, CEO John Rodgerson said.

Nikhil Ravishankar, CEO of Air New Zealand, said airlines can only raise ticket prices so much to offset higher fuel costs.

"The market will respond and demand will soften and then you fly less," he said in an interview.

Airlines have two primary costs: fuel and labour. Sudden increases in fuel are hard to absorb because many tickets are sold weeks or months before travel. Longer routes also burn more fuel and make aircraft and crews less efficient.

The challenge is how much of the latest fuel hit can be passed on to travellers before higher fares start to weaken demand.

FARE POWER

So far, travel demand has held up in several large markets, especially among premium and corporate travellers, giving carriers more room to raise fares.

In the United States, domestic published fares as of May 25 showed robust demand and successful pass-through of higher fuel costs, with one-week-out fares up 35.8 per cent year-on-year and four-week-out fares up 39.4 per cent, according to Raymond James.

"The willingness to pay over the past few years, crisis and no crisis, from the premium side has been really strong, and we see that strength continuing," Alexandre Lefevre, Air Canada's vice president of network planning and global sales, told Reuters.

Still, there are limits. Higher fares can help airlines recover part of their fuel bill, but they also risk pushing out travellers with tighter budgets.

That risk is greater in regions where currencies are weak, consumer spending is under pressure, or airlines lack the pricing power of large network carriers.

Some carriers are still planning for growth. Singapore Airlines is in talks for at least 50 large wide-body jets, while Qantas is weighing an order for about 20 Airbus or Boeing wide-body aircraft, Reuters reported this week.