Analysis: the airline industry was on the road to recovery after the pandemic, but Russia's invasion of Ukraine has changed all that
The travel and tourism industry is vulnerable to natural and human-caused disasters, such as terrorist attacks, pandemics, political unrest and economic crises. After terrorist attacks, airlines respond with reduced fares to stimulate demand. The Covid-19 pandemic has severely affected airlines and airports in many ways and caused significant drops in travel demand.
The airline industry was on a steady road to recovery after the pandemic before Russia invaded Ukraine. Shocking pictures and heart-breaking stories from Ukraine have quickly spread. After the invasion, numerous countries, including the EU, imposed sanctions on Russia, the world's largest producer of crude oil.
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From RTÉ Radio 1's This Week, Eoghan Corry on how the pandemic has impacted the aviation sector
The US banned all Russian oil and gas imports, and the UK decided to phase out Russian oil by the end of 2022. According to US Energy Information Administration, Europe depends on Russia for 30% of the region's oil supply, accounting for 72% of Russian crude oil exports. The EU stated that they will switch to alternative suppliers and become independent from Russian energy by 2030.
More than 40 countries, including the EU and the US, have closed airspace to Russian airlines, and Russia has, in turn, banned airlines from those countries from flying over Russia. International air passengers between Russia and Europe accounted for 5.7% of total European traffic in 2021. All routes between Europe and Russia have been cancelled.
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From RTÉ Radio 1's The Business, Chris Weafer from Macro-Advisory and David Horgan from Petrel Resources on Russian sanctions and oil prices
Before the Ukraine invasion, air travel seemed to be recovering following the easing of the travel restrictions, and numerous travellers were ready to plan their summer holidays and book their tickets. Domestic bookings neared 90% of pre-Covid levels, and international bookings exceeded 50%.
However, the week after the invasion, bookings in Europe dropped by 14% compared to the week before. While there has been a surge in outbound booking for flights, this can be attributed to refugees fleeing the war. These flights from Poland, Hungary and Romania are mainly to India, Nigeria, Georgia and Morocco, countries with sizeable Ukrainian expat populations. Travel and tourism arrivals at states neighbouring Ukraine may notice some drop, with passengers hesitant to travel in that direction.
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From RTÉ Radio 1's Morning Ireland. Dublin Airport had its busiest period in three years over the St Patrick's Day period
The most significant effect will be the increase in air fares. Because of the war, the soaring oil cost will significantly impact the cost of travelling. Fuel accounts for around 30% to 35% of the total operating cost for an airline, and it is a cost which impacts the ticket price. Airlines are still trying to cut losses as they emerge from the pandemic, and a significant and long-lasting increase in their operating cost will soon be reflected in the yields.
The most worrying part for the aviation industry is uncertainty over fuel prices. On March 4th, jet fuel prices rose to $141 per barrel, up 27% on the month. On March 11th, jet fuel was at $136 per barrel, 23.5% higher than a month earlier and 89.2% higher year on year. IATA, the International Air Transport Association, monitors the oil prices and the current estimate of the impact on the 2022 fuel bill is $82.1 billion.
Passing the fuel cost to the passenger is common, but higher airfares will reduce demand for air travel with significant negative effects for the tourism industry. However, numerous airlines have entered into agreements and hedged their fuel. Fuel hedging is a contractual agreement that locks in the cost of future fuel purchases and reduces the airlines' exposure to volatile and potentially rising fuel costs.
Airlines will need to reconsider their network structure, reduce costs and engage in serious revenue management activities
Ryanair has hedged 80% of its fuel at $63 per barrel through to March 2023. Air France KLM has hedged 72% of its fuel for the first quarter and 63% for the second quarter at $90 per barrel. On the other side, some airlines like United and American have not done any hedging.
While passing the fuel cost to the passenger may sound like a simple option, it is not. Higher cost of living and increased household energy bills mean that the consumer's spending power is reduced, and airlines will not be able to sufficiently increase the flight tickets price without cutting capacity to non-profitable routes.
Airlines will need to reconsider their network structure, reduce their cost where possible and engage in serious revenue management activities. The situation will be very difficult for the travel and tourism industry in Europe this year, but sanctions against Russia need to continue to stop the war and this humanitarian crisis.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
