https://www.bbc.com-By Jonathan Josephs-Business reporter, BBC News
Image source, AFP
Higher oil prices are set to lead to a 10% increase in air fares, according to the boss of one of the world’s biggest airlines.
Delta Air Lines head Ed Bastian told the BBC the final impact “really depends where fuel prices settle”.
Oil prices have reached 14-year highs after Russia’s invasion of Ukraine.
Emirates, Japan Airlines and AirAsia are among the big carriers to introduce surcharges on their tickets recently to cover the higher cost 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 prices “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 the international flights which account for about 35% of its business, and increase US ticket prices.
Jet fuel is one of the biggest costs for airlines. Michael O’Leary, the boss of Europe’s biggest carrier Ryanair, said recently that the surge in oil prices would lead to “materially higher” airfares this summer.
Many airlines try to protect themselves from these changes by buying fuel in advance. Easyjet and British Airways both said recently that they had done so for 60% of their fuel needs this year.
This year has seen big fluctuations. At the start 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 told the BBC: “I think the $100 [oil] we are experiencing today may not be the highest level of prices we’ll be seeing in the next weeks”.
He warns that will be felt across all areas of the global 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.
Reports from India suggest 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”.
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 said. “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 needs to 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 cost 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 investing in scaling up production.
“Scale will bring costs down over time, and will bring more capital from private sources into exploration and looking for new technology. This next five years is critical that to make sure we get government support, not just in the US but around 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 global demand 58.4% down on 2019 levels.
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 decided that Covid is done.”
“We’re seeing some of our largest bookings we’ve ever had in our history. And it’s not just in the US, it’s internationally as well.” However, he adds that Asia is lagging behind other regions.
Crucially demand 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’s forms of business travel that will never return, that are more efficient to handle over video technology”, but adds that leisure travellers are now showing more willingness to splash out on premium services.
Last year Delta recorded a pre-tax loss of $3.4bn and the disruption caused by coronavirus at the start 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 prices. But I do expect starting in the second quarter and beyond that we’ll be profitable.”