Higher oil prices to raise ticket fares but will not stall airlines' recovery, Iata says

Global carriers will shoulder total accumulative losses of $201bn between 2020 and 2022, as a result of the pandemic, according to industry body

Willie Walsh, director general of the International Air Transport Association, said higher pricing will reflect airlines' cost of operations, rather than a supply-demand dynamic. Photo: Reuters

Rising oil prices will add pressure on airlines' costs, forcing them to pass on some of that burden to passengers by raising air fares, but will not stall the recovery of carriers, according to the head of the International Air Transport Association.

Global airlines, already battered over the past 20 months by the Covid-19 pandemic that has hit their revenue, are facing stronger oil prices of about $80 per barrel and increasing fees from air navigation service providers (ANSPs) seeking to recoup their own losses, Willie Walsh, the director general of Iata, said in an online media briefing on Wednesday.

"The issue that will impact fares in the short to medium-term will be the high price of oil, that continues to remain stubbornly high ... and increased charges by ANSPs and airports," Mr Walsh said. The industry has no choice but to reflect this into ticket prices."

Oil prices have hit multi-year highs with global supplies constrained while demand is rising as developed economies rebound faster than expected from the coronavirus-induced slowdown. Brent, the global benchmark under which two thirds oil trades, has gained more than 60 per cent since the start of the year and was trading at $82.87 a barrel at 6.30pm UAE time on Wednesday.

Fuel typically makes up 25 per cent of an airline's cost. Global carriers will shoulder total accumulative losses of $201 billion in the period between 2020 to 2022, as a result of the pandemic that brought air travel to a halt, according to Iata's latest industry report in October.

"Higher oil prices will reflect in ticket prices," Mr Walsh said. "Where airlines have made huge losses in recent years, it's impossible to absorb increases and will have to be passed on to consumers and will have to be reflected in the pricing."

The higher pricing will reflect airlines' cost of operations, rather than a supply-demand dynamic, Mr Walsh said.

Still, the current rise in oil prices is a "positive for the industry" as it reflects improving economic conditions that will in turn help the aviation industry, the Iata chief said.

Mr Walsh said the stronger oil prices will not dampen the airlines' recovery as most of them have "low hedging" and he does not expect that to distort competition between the carriers.

High oil prices "may make some management teams more cautious about adding back in capacity," he said. "But capacity will come back to reflect the increase in demand as restrictions on travel get removed."

In September, domestic travel was down 24.3 per cent compared to September 2019, a significant improvement from August 2021, when traffic was down 32.6 per cent versus two years ago, Iata said in its monthly report.

International passenger demand in September was 69.2 per cent below September 2019, fractionally worse than the 68.7 per cent decline recorded in August, amid continuing border closures and quarantine mandates.

Middle Eastern airlines had a 67.1 per cent drop in overall passenger travel last month, compared to September 2019, slightly improved over the 68.9 per cent decrease in August, versus the same month in 2019. Capacity declined 52.6 per cent, and load factor slipped 23.1 percentage points to 52.2 per cent.

Air cargo demand continued to be well above pre-crisis levels, though capacity constraints persist.

Global freight demand, measured in cargo tonne-kilometres, was up 9.1 per cent last month compared to September 2019.

"There is a benefit from supply-chain congestion as manufacturers turn to air transport for speed. But severe capacity constraints continue to limit the ability of air cargo to absorb extra demand," Mr Walsh said.

If this is not addressed, bottlenecks in the supply chain will slow the economic recovery from Covid-19.

"Governments must act to relieve pressure on global supply chains and improve their overall resilience,” he said.