Airline companies stare at a burning issue as fuel prices skyrocket

The aviation industry invariably falls on the receiving end whenever there is a financial crisis or geopolitical issue. At a time when the sector is struggling to come out of the turbulence caused by the government’s new travel policy and last year’s devastating hurricanes, it has a fresh challenge to handle.

Last week, fuel prices surged to a multi-year high in the domestic market, further clipping the wings of the airline companies already struggling to meet their performance goals. For many, the historically low fuel prices in recent years had been a blessing.

If the squeeze on profit extends into the upcoming travel season, most operators would be left with no other option but to scale down capacity once the peak period ends. A fare-hike that is proportionate to the rising costs will not be a viable alternative due to regulatory constraints, while too much reliance on utilization flying would compromise on safety.

However, experts believe the uptrend in gasoline prices would force airlines to ultimately pass on the additional burden to passengers, driving up airfares in the long term. It is likely to be done by adding a fuel surcharge to ticket prices, a practice followed during crisis situations such as short-supply.

Fuel prices surged to multi-year highs in the domestic market, dragging the profits of airline companies

The fact that crude prices remained at record lows since the plunge in 2014 was enough reason for companies to rule out an abrupt spike in prices and remain unprepared. In reality, prices moved up nearly 60% over the past 10 months. Meanwhile, the ongoing revision of domestic fares and the steady growth in passenger traffic have come as a relief.

The potential damage to the sector from the rising fuel prices can be gauged from the downbeat outlook announced by American Airlines (AA), which owns the largest aircraft fleet in the world, projecting a staggering $2-billion increase in costs this year due to high gasoline prices. In the first quarter, the company’s earnings plunged 45% year-on-year, despite an increase in revenues, triggering a selloff. The stock lost more than 4% after the announcement and is trading flat since then.

It was a similar scenario at Delta (DAL) — flat profit despite strong revenues. Though the stock made some gains after the earnings report, it traded lower throughout last week.

JetBlue (JBLU) reported a rise in first-quarter earnings, mainly benefiting from a seasonal increase in revenues and tax-related gains. However, the company forecasted a decline in RASM for the coming quarter. Shares of JetBlue lost nearly 4% since the earnings announcement, after gaining initially.

Meanwhile, as an exception, United Airlines (UAL) managed to override the impact of a 26% increase in fuel costs in the first quarter and registered higher earnings.