Airlines face new challenge with fuel prices on upswing

Just as airlines start to emerge from their biggest slump on record, the industry is facing a new headache: a rapid rise in fuel prices.

Escalating fuel costs will create a dilemma for carriers who unwound hedges that proved costly when demand suddenly disappeared when the coronavirus hit last year, said John Grant, senior analyst at OAG, which tracks aviation trends.

“It’s more than a concern,” given that the fuel bill is the one of airlines’ biggest and most unpredictable costs, he said in a webinar.

Global capacity remains just above half of pre-pandemic levels, with the domestic U.S. market a bright spot for growth, according to OAG. Carriers are going to have to re-evaluate capacity plans because rising fuel prices require fuller flights to break even, said Brendan Sobie, a consultant at Sobie Aviation.

Demand for jet fuel and kerosene is expected to take until 2024 to recover to pre-pandemic levels, according to the International Energy Agency.

Still, oil prices—which underlie jet-fuel pricing—have skyrocketed from below $20 a barrel at the height of lockdown last year to near $70 as the demand outlook improves with the rollout of Covid-19 vaccines and output cuts from OPEC+ members tighten supply. Crude is up almost 34% this year.