Higher oil costs are set to lead to a 10% gain in airfares, according to the boss of one of the world’s largest airlines.
Delta Air Lines
Delta Air Lines head Ed Bastian said the BBC the final result”really depends on where fuel costs settle”.Oil costs have reached 14-year highs after Russia invaded Ukraine.
Emirates, Japan Airlines, and AirAsia are among the big carriers to introduce surcharges on their tickets recently to cover the higher price of jet fuel.
Before the pandemic, in 2019, 200 million customers flew on Delta, making it the world’s second-biggest airline by passenger numbers. Mr. Bastian said that on a domestic US flight the rise in fuel costs” is probably about $25 on a ticket, that could be anywhere between 5% to 10% at these high levels of oil and international [flights] will be a bit higher than that”.
Delta is planning to introduce fuel surcharges on international flights which account for about 35% of its business and improve US ticket costs.
Many airlines try to protect themselves from these changes by purchasing fuel in advance. Easyjet and British Airways both said recently that they had done so for 60% of their fuel requirements this year.
This year has seen big fluctuations. At the beginning of January, Brent crude – the international benchmark for oil – was under $80 a barrel, but it recently reached as high as almost $130 as the US and UK said they would end their use of oil from the world’s biggest exporter, Russia.
More price swings are likely in the short-term according to the executive director of the International Energy Agency, Dr. Fatih Birol. He informed the BBC: “I think the $100 [oil] we are experiencing today may not be the highest level of prices we’ll be visiting in the next weeks”.
He warns that will be felt across all areas of the international economy because as well as higher transport costs it will lead to more expensive heating and electricity. That would exacerbate the cost of living crisis many countries are facing.
Information from India suggests it is considering tackling high prices at the petrol pumps by buying discounted Russian oil. Many won’t purchase it because of western sanctions, and Dr. Birol warned: “One shouldn’t forget that every single dollar for oil going to [the] Russian economy will go back as a tank or as a bullet to Ukrainian people. One shouldn’t forget this moral aspect in my view”.
Saudi Arabia to increase oil production
Instead, he wants Middle Eastern countries including Saudi Arabia to increase oil production. The latest IEA forecast says three million barrels a day of Russian oil could be removed from the market. However, that drop in supply could be offset by a fall in demand from China where Covid has led to new lockdowns.
All this unpredictability means Delta does not try to buy its fuel in advance, Mr. Bastian told. “Sometimes you win, and often you lose.”
Instead, Delta has the protection of owning its oil refinery in Pennsylvania, although it has been unsuccessful in recent efforts to try to sell it.” We’re thrilled that we have it right now,” says Mr. Bastian . The Delta chief is also looking to a future where initiatives to tackle climate change by cutting aviation’s carbon emissions mean oil prices are less of a concern.
“The existing fossil fuel and jet fuel technology must go, and we need to make those investments for the future towards a sustainable future.”This means moving towards sustainable fuels such as biofuels or synthetic alternatives made through chemical processes.
Mr. Bastian says that price is the big impediment, with the production of such substitutes costing “three to five times what’s in the marketplace today”.The difference will need to be made by governments supporting in scaling up production.
“Scale will bring prices down over time and will bring more capital from private sources into exploration and looking for new technology. This next five year is critical to make sure we get government support, not just in the US but almost the world.”
Returning to profitability after the losses of the pandemic will also help fund the development of new technologies. According to the International Air Transport Association, the industry lost more than $51bn last year with international need 58.4% down on 2019 levels.
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As Covid restrictions continue to ease, Delta had two record days of sales last week, leading Mr. Bastian to be hopeful about the outlook.”The world is returning to travel and governments have determined that Covid is done.”
“We’re seeing some of the biggest bookings we’ve ever had in our past. And it’s not just in the US, it’s internationally as well.” However, he adds that Asia is lagging behind other regions.
Crucially need for lucrative business class fares is also returning. It is currently at about 60% of pre-pandemic levels, but Mr. Bastian expects this to rise to 70% by the summer.
He concedes “there are forms of business travel that will never return, that are more efficient to operate over video technology”, but adds that leisure travelers are now showing more willingness to splash out on premium services.
Last year Delta recorded a
Last year Delta recorded a pre-tax loss of $3.4bn and the disruption caused by coronavirus at the beginning of this year means Mr. Bastian thinks that will be added to at the start of this year.
“We will lose some money primarily because of Omicron, it’s not fuel costs. But I do hope to start in the second quarter and beyond that, we’ll be profitable.”
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