The travel industry faces a double whammy of falling customer demand and rising costs, threatening the vital Easter getaway period, experts have warned.
Three weeks of war in the Middle East, including the shutdown of the Strait of Hormuz, is already pushing up operating costs. Airlines were already having to reroute from the region amid fears of missile and drone attacks, causing longer journeys. Now jet fuel prices have risen sharply, with European prices doubling and Asian prices up almost 80 per cent since US and Israeli strikes on Iran began in late February.
While most European airlines are cushioned by fuel hedging contracts, those are set to run out in the coming months, with chief executives warning at the annual A4E summit in Brussels on Thursday that Europe will not be immune to higher ticket prices tied to more expensive oil.
head of markets at AJ Bell
It coincides with customers across Europe facing the prospect of a more painful squeeze on their wallets from sharper price rises than previously expected.
On Thursday, Bank of England governor Andrew Bailey said the Middle East conflict had pushed up global energy prices, with this already being seen at petrol pumps.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said after the post-pandemic cost-of-living crisis, many had been looking forward to some relief from higher living costs in the months ahead.
“Instead, consumers are now facing sharp energy price rises amid fears that prolonged disruption to oil supplies could trigger a fresh round of runaway price rises.
“This would have implications for the prices of all the goods and services UK households consume – from energy and fuel, to food, travel, entertainment and more – delivering a fresh blow to budgets.”
Following an Israeli strike on its main natural gasfield, Iran hit numerous energy sites across the Gulf on Wednesday night, including a Saudi oil refinery, Qatari gas facilities and two oil refineries in Kuwait.
Oil prices jumped to $119 per barrel on Thursday morning in the wake of the attack, before falling back slightly to $113, threatening higher global inflation amid concern about the security of the supply of fossil fuels.
Some airlines have already slashed their flight schedules. Scandinavian airline SAS followed Air New Zealand by saying it would cancel 1,000 flights in April because of high oil and jet fuel prices.
Dan Coatsworth, head of markets at AJ Bell, told The National the travel industry was braced for “considerable volatility”, while the usual tactic of slashing prices to intensify demand was not an option.
“Plenty of airlines have already suspended flights to Middle East destinations for the foreseeable future, but it looks like this trend might spread further afield if demand weakens more broadly and oil prices stay at elevated levels,” he said.
“Airlines will need to have their planes at full capacity to warrant taking off in a high oil price environment, otherwise it’s not worth their while taxiing to the runway.
“It’s hard to imagine airlines starting a price war in the near-term. The industry would normally slash ticket prices when demand weakens to try to drum up more business, but the economics might not stack up at a $100-plus a barrel of oil price. Airlines typically lock in a chunk of fuel costs at a fixed price, but they won’t be immune from the recent oil price spike completely. If anything, air fares are likely to go up before they come down.
Mr Coatsworth added: “There is also the issue of potential fuel rationing if supplies tighten. That might force certain airlines, particularly ones based in South, South-east and East Asia, and East Africa, where there is a high dependence on Middle East imports, to cancel flights.”
The International Energy Agency has said jet fuel markets are “particularly vulnerable” to an extended loss of Middle East production and exports, given limited flexibility elsewhere to increase output. It has led to warnings of potential fuel shortages.
Finnair has warned that jet fuel supplies may run out due to the effective closure of the Strait of Hormuz. Vietnam this week warned of possible flight cancellations due to China and Thailand halting exports of fuel, with other countries expected to follow suit. It could lead to the potential scenario of airlines refusing to fly to some long-haul destinations in case they cannot refuel for the return journey.
Watson Farley & Williams, the energy, infrastructure and transport law firm, said current constraints on refineries and supply lines would be felt across the travel industry.
“If airports and airlines’ stocks of fuel are depleted for any length of time, airlines will cease to be able to fuel their aircraft and will have to reduce their operations,” it told The Times. “This may have far-reaching consequences.
SAS chief executive Anko van der Werff said the company had cancelled a “couple of hundred” flights this month. The airline normally operates 800 daily flights and that the measures taken were not drastic, he added.
“The price of jet fuel has doubled in 10 days,” he said. “Even if we try to absorb cost hikes as far as we can, this is a shock that strikes directly at the aviation industry.”
Research for Travel Weekly found up to 40 per cent of holidaymakers intending to travel abroad over the Easter holiday were changing their plans.
The Harris Poll UK managing director Sarah Beams said: “Consumers are not abandoning the idea of international travel but are postponing decisions while monitoring global developments and gravitating towards perceived lower-risk options, with many respondents indicating a shift towards trips that feel more predictable or easier to manage.
“Short-haul travel is becoming more attractive. In contrast, willingness to take long-haul trips or cruises has weakened, consistent with a broader trend towards caution and reduced exposure to disruption. Confidence in travel to or via the Gulf region remains particularly fragile.”
EasyJet chief executive Kenton Jarvis said consumers should book their flights early to avoid a rise in prices.
Ryanair chief executive Michael O'Leary said European tourists are likely to travel closer to home to cut flight times and avoid flying long-haul over the Middle East.
Company chiefs said it was too early to tell how the aviation ecosystem will be reshaped by the war in the longer term.
British Airways is adding more flights to destinations such as the Caribbean that avoid flying over Middle Eastern airspace, while Lufthansa chief executive Carsten Spohr said the airline is to launch a new route to Malaysian capital Kuala Lumpur as it expands flights to South-east Asia.
