Russian airspace ban to hit Europe-Asia routes and disrupt cargo, Moody's says

Rising fuel costs to affect unhedged airlines, with increased costs leading to higher airfare, credit rating agency says

An Aeroflot plane is parked on the tarmac in Geneva after the closure of airspace to Russian airlines and private aircraft. EPA
Beta V.1.0 - Powered by automated translation

The ban on flying over Russian airspace as a result of Moscow's military offensive in Ukraine will hit routes from Europe to Asia the hardest, disrupting air cargo and stifling supply chains, Moody's Investors Service said.

Finnair in Helsinki is the European airline most affected by the airspace ban, flying around 40 per cent of capacity to the Asia-Pacific region, while the exposure for other long-haul airlines is about 10 per cent to 20 per cent, the credit rating agency said in a report.

For airports, exposure to Asia-Pacific routes varies with London Heathrow having the biggest exposure to the Asian market, which is expected to be affected by the closure of airspace, although current passenger volumes remain low, Moody's said.

"Logistical challenges in rerouting will add costs, causing temporary cancellations and ongoing disruption," it said. "Air cargo, which is a small component of traffic for most rated European airlines and airports, will also be disrupted, affecting supply chains for products including medical equipment, consumer electrical goods and textiles."

Ryanair is the most hedged airline and is at a competitive advantage amid the headwinds of the Russia-Ukraine conflict. AFP

The global aviation industry is exposed to the conflict-related sanctions on Russia given the size and integration of the country into the sector. Plane manufacturers, lessors, aircraft maintenance companies and insurers serving Russian airlines such as Aeroflot are among those directly hit by the sanctions.

International airlines, meanwhile, are suffering from sharply rising oil prices and the additional cost of rerouting flights to avoid Russian airspace, which is expected to drive up ticket prices and air cargo rates.

"Ripple effect from the Russia-Ukraine war may trim air travel demand and pressure fare," George Ferguson, senior aerospace analyst at Bloomberg Intelligence, said of intra-Europe travel in the second quarter of 2022.

The conflict has resulted in a steep increase in crude oil prices, so airlines' fuel costs will increase although most European carriers are about 50 per cent hedged for 2022, Moody's said. Hedged airlines could typically see a 20 per cent to 25 per cent increase in fuel costs compared to expectations at the start of 2022, if current jet fuel prices are sustained.

Pressures will rise if jet fuel prices remain high through the rest of the year and into 2023, when the fuel hedging cover reduces.

Hungary-based Wizz Air has more limited hedging and is more immediately exposed, while Ryanair is the most hedged and at a competitive advantage, the report said.

"With fuel costs representing around 22 per cent of revenue for the industry globally in 2019, the increased costs would need to be passed through to ticket prices to preserve profitability," Moody's said.

"This would imply ticket price increases for hedged airlines of around 5 per cent to maintain margins, although the effect will vary significantly depending on the effective fuel costs incurred by each airline and demand elasticity for different routes."

However, European airlines in general have "very low exposures" to routes between Europe and Russia or Ukraine as a proportion of their total traffic, the report said.

Wizz Air is the most affected, with these routes representing about 9 per cent of summer 2022 schedules by available seat capacity. Turkish Airlines flies about 2.5 per cent of its capacity to Russia, while for the larger airlines exposure is less than 2 per cent, Moody's said.

The exposure of the Moody's-rated European airports to routes into Russia and Ukraine is also limited, mostly at less than 1 per cent of total annual passenger traffic. Prague airport has the biggest exposure at more than 5 per cent. Moscow Domodedovo is the only Moody's-rated Russian airport and is by far the most exposed, the agency said.

Looking ahead, demand for popular leisure routes in the summer could remain robust but is uncertain amid risks of military conflict escalation, Moody's said.

"Airlines are still recovering from the pandemic and from a low base at the start of 2021, and benefiting from loosening travel restrictions across Europe and transatlantic routes. Their high growth forecasts for summer 2022 may now need to be tempered," the report said.

Pent-up demand still has the potential to drive a continued recovery in passenger volumes in summer, especially for traditional leisure destinations in southern Europe, as well as routes west towards central and North America and the Caribbean, it said.

Inbound tourist travel into Europe is more likely to suffer, as well as routes into Eastern Europe.

"An escalation of the military conflict may dampen demand, with a potential knock-on effect on the ability of airlines to pass through higher fuel prices," Moody's said.

"The challenges airlines face in recovering pre-pandemic volumes and profitability through to 2023 have increased, with risks of higher fuel costs, higher inflation and lower disposable incomes dampening consumer demand."

Updated: March 10, 2022, 10:41 AM
EDITOR'S PICKS