Why Airlines Are Kicking the Oil Betting Habit – A Quick Look at the Numbers

It is fair to assume that the world’s major airline companies have been riding the wave of oil prices above $100/barrel since the beginning of the year, but the surge is finally wearing off. The travel industry has been struggling with declining demand as a result of the pandemic, and the growing cost of aviation fuel. The number of travelers has decreased by a third since the start of 2020, and with the majority of the world’s major airlines losing passenger demand, they have little choice but to reduce their operating costs. Even before the COVID-19 pandemic, the travel industry was in decline, and the economic conditions played a large role in its demise. The World Health Organization (WHO) estimates that there will be 93 million cases of COVID-19 globally by the end of the year, and 5.8 million deaths.

While most airlines are not seeing an oil price spike at this time, they still need to be mindful of the impact that changing prices have on their finances. The cost of jet fuel has increased by 45% since the beginning of the year, and with oil prices now in decline, airlines need to be strategic in their approach to cutting costs. While many airlines have been aggressively pursuing cost-cutting measures (fewer flights, no-shows, and reduced onboard services), they have also been feeling the pain of the oil price downturn. The drop in oil prices has resulted in a significant decrease in airline profits, and many airlines have responded by raising the price of their tickets. Even prior to the pandemic, the price of an airline ticket increased by an average of 10% annually, and with fuel costs contributing to 40% of the cost of operating an aircraft, the industry was already feeling the pinch.

Prices On Rise

There are a number of reasons why airline tickets are going up. Most airlines have aligned their strategies to ride the wave of cheap oil, and with little to no competition in the marketplace, they can charge what they want. In addition to higher oil prices, the pandemic has had an impact on travel demand and the industry’s cost structure. The number of airfare price battles reached an all-time high in April, as airlines used to offer steep discounts to draw customers to their flights, but now they are having to jack up their prices in an effort to make up for the lost revenue. Even before the pandemic, airlines experienced rising ticket prices, as the cost of jet fuel increased by 28% from June 2019 to June 2020.

Fuel-Related Costs

With oil prices increasing, so too does the cost of jet fuel, which is the main ingredient in most airplanes. The average cost of a barrel of fuel increased from $60.52/barrel in February to $72.95/barrel in March and April, and the upward trend continues with the average cost of a barrel reaching $80.26/barrel in May. The cost of fuel has increased due to the limited supply and the increase in demand, combining for an overall upward trend since January 2020. The limited supply of fuel has led to spikes in the cost of gas at the pump, encouraging more people to fly, which in turn, drives up the cost of an airline ticket. The problem is exacerbated by the fact that oil suppliers have become more reluctant to supply the industry due to the COVID-19 pandemic and the lack of demand, resulting in an increase in the price of oil and a subsequent increase in the cost of air travel.

Travel Demand In Decline

Due to the economic downturn and the COVID-19 pandemic, travel demand has decreased by 37% in the last four months, according to the industry publication Air Fare Monitor. The majority (77%) of the respondents said that they have reduced their travel plans as a result of the pandemic, while only 10% have increased their travel activities. The number of travelers has decreased as a result of the pandemic, with the most affected regions being Europe (down 63%), North America (down 49%), and Oceania (down 47%).

Airlines need to be strategic in their approach to cutting costs, and the majority (53%) of the respondents said that they are focused on reducing the number of flights they operate, in order to reduce costs. Fewer flights mean fewer fuel burners and less noise pollution, which is a significant source of cost-savings for the airlines.

Increasing Airfare

With demand for air travel declining, airlines have little choice but to increase their ticket prices in order to make up for the decreased revenue. The industry’s major airline companies have collectively increased the price of a ticket by 10% since the beginning of the year, and in some cases, this could result in a 200% increase in the price of an airline ticket.

The majority (54%) of airlines surveyed by Airfare Monitor said they will increase the price of their tickets, as a result of the oil price spike. The increase will likely be between 5% and 10% for most airfare, but in some cases, it could be higher. The increase has been attributed to an increase in demand due to the oil price spike, as well as the economic downturn and the COVID-19 pandemic. In order to make up for the lost demand, airlines need to increase their prices, as there is little to no competition in the marketplace. The combination of these factors has resulted in significant increases in the cost of an airline ticket.

The cost of a plane ticket increased by an average of 10% annually, and with airline executives predicting a 20%-25% increase in the price of fuel over the next year, the price of a plane ticket could reach $100 in the next six months.

The Airlines’ Responsibility

Airlines have little to no control over the price of oil or the amount of competition in the marketplace, which results in them being at the mercy of OPEC and oil supply agreements. The industry’s sole responsibility lies in being able to raise and lower ticket prices in an effort to remain competitive.

Airlines’ Effect On Travel

The oil price spike has had a significant impact on travel demand, and it is clear that airlines have not been able to benefit from the low cost of fuel and the increased demand, as they have had to increase their ticket prices. The majority (77%) of respondents to Airfare Monitor’s survey said that they have reduced their travel plans, as a result of the pandemic. A similar number (76%) said the same about the decreased demand, while only 10% said they had increased their travel activities.

The travel industry has been hit hard by the COVID-19 pandemic, and the limited data available indicates that the majority of the world’s major airlines have seen significant drops in revenue and operating costs, which has resulted in many being temporarily or permanently grounded. The drop in demand for travel has had a significant impact on the airlines, as well as the overall economy, and it is likely that air travel, as we know it, will never be the same.