Just as the airline industry was seeing the green shoots of turnaround after the worst of the Covid pandemic, Valdimir Putin has thrown a wrench into the industry rebound. The share prices of major airlines have plummeted.
by Brock Friesen and Horst Findeisen
Just like ordinary automobile drivers at the fuel pump, airlines are now faced with rapidly escalating fuel prices. Industry margins are typically so low that airlines need to pass these along to customers immediately. Ticket prices will definitely rise.
Coming out of the pandemic, consensus is that leisure travel will rebound faster and further than business travel. This happens to be the price sensitive segment. Now prospective leisure customers are faced with even faster escalating post-Covid inflation in all of their essential purchases because of higher fuel prices generally. Hence, they have less discretionary income available to purchase increasingly expensive airline tickets.
Additionally, ticket prices will rise at most airlines since they will be forced to burn more fuel because direct air routes are unavailable. Clearly, war zones must be avoided. More importantly, the whole system of so-called first freedom rights, the authority to overfly, has been disrupted. Russia has retaliated against air space closures imposed by many Western countries on their airlines.
Given its land mass, Russia controls many of the shortest routes from Europe to Asia. For decades, Russia has levied considerable overflight charges. Years ago, Politico estimated €350 million annually to be paid by European airlines alone. But using these overfly routes was still much cheaper for the airlines than flying long circuitous routes. At 15 hours flight time, Japan Airlines’ flight from Tokyo to London for instance now takes three hours longer according to an analysis by the Independent. (Article from Independent)
At this time, even airlines which are still allowed to overfly Russia may prefer to avoid Russian airspace irrespective of costs. In 2014 the Russians shot down a Malaysian civil aircraft. Before that, they shot down a Korean Airlines aircraft.
Longer flights mean higher fuel burn and CO2 emissions. More fuel at record high kerosene prices drives up costs but longer flights also mean higher costs because of reduced aircraft utilization and increased crew flying hours. Fortunately, Europe – America routes are not affected, but hundreds of flights every week previously overflew Russia, Belarus and the Ukraine.
No airlines are winners as a consequence of Putin’s war. The narrow bodied operators in Europe, America, and Asia will feel less pain and are better able to adapt even though skyrocketing fuel prices will depress overall demand by travellers. However, carriers with extensive long-haul operations to and from Asia will be severely challenged.
Air cargo demand has increased sharply because of Covid induced supply chain issues. In some or many cases, shippers were willing to pay more for the certainty of delivery that air cargo offers. Since higher fuel prices will be passed along to the shippers, the extra cost of air as a substitute of sea travel will increase. The overall impact will be inflationary for everybody.
As intended, the economic response to Putin’s aggression has hit Russian airlines the hardest. They are facing the repossession of 50% of their fleet which is leased from Western lessors. Their main distribution IT provider, Sabre, has stopped its service. Aeroflot’s SkyTeam partners Delta and KLM have already cancelled their codeshare agreements and we expect SU’s expulsion or suspension from the alliance shortly.
For sure, Russian civil aviation has been damaged for many years to come. But all other airlines are suffering collateral damage.
March 8, 2022