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Airline Profit Hopes Fade With $125 Oil as U.S. Mulls Ban

Airline Profit Hopes Fade With $125 Oil as U.S. Mulls Ban

Airlines are seeing prospects for a strong profit rebound from two years of coronavirus turmoil rapidly slip away after the price of oil reached $125 a barrel on Monday.

An oil shock triggered by Russia’s war in Ukraine is the latest blow to carriers that have already had to cancel flights and reroute long-haul journeys to avoid shuttered airspace. The price of crude spiked after the U.S. said it would consider a boycott of Russian supplies.

Earnings are at risk in Europe, where higher fuel costs will add to widespread flight disruption, while carriers in the U.S. and Asia are largely unhedged and will feel the full impact of price rises. 

Airline shares tumbled in all three regions, extending losses that have been piling up for the past several weeks. Oil neared $140 a barrel at one point after the U.S. said it was mulling a ban on Russian crude imports.

Disruption in Europe

Wizz Air Holdings Plc, the biggest discount carrier in eastern Europe, reversed its no-hedging policy on Monday to protect from further increases in oil prices. The hedges will cap fuel-cost exposure for the next four months. 

The Hungarian airline had already been cut off from Ukraine -- one of its fastest-growing markets, and where four of its aircraft are trapped -- and Russia’s second city of St. Petersburg. It will now limit its expansion plans this summer.

Other European airlines are feeling the pinch, with No. 1 discounter Ryanair Holdings Plc and German giant Deutsche Lufthansa AG altering schedules. Surplus jets will be redeployed into Western Europe, setting up a supply-demand imbalance. That threatens to hurt ticket prices in a peak summer season on which travel firms have been pinning hopes for a rebound.

More Losses

Before the Ukraine conflict, the International Air Transport Association was considering narrowing its estimate issued last October for industry-wide losses of $11.6 billion this year. That now seems unlikely.

In Asia, China Southern Airlines Co., the country’s largest carrier, closed 8.3% lower. The slump continued in European trading hours as Wizz Air dropped as much as 16% before paring its losses to finish down 6.6%. Discount rivals Ryanair and EasyJet Plc lost 7.9% and 7.5% respectively. 

Network airlines in the region also fell, before selling kicked in targeting U.S. carriers. United Airlines Holdings Inc., American Airlines Group Inc. and Delta Air Lines Inc. lost 6.8% or more as of 12:29 p.m. in New York.

“Investors believe that airlines will likely pass on the spike in crude costs to consumers in the form of fuel surcharge but are worried about the price elasticity of demand,” Citigroup analysts said in a research note Monday after meetings in the U.S.

Long-Haul Squeeze

Jet-fuel prices have surged 50% year-to-date and are 74% above 2019 levels.

Agency Partners analyst Sash Tusa said the squeeze will be worse for European network carriers like Lufthansa, British Airways owner IAG SA, Air France-KLM, Finnair Oyj and SAS AB, given the impact of diversions or lost routes and the fact that discounters generally have newer, more fuel-efficient planes.

“It damages long-haul airlines versus short haul,” he said. “A proportion of the international long-haul model is utterly broken as a result of not being able to overfly Russia.”

Long-haul carriers in particular might now find it “very hard to get through 2022” without a return to equity fundraising, something that will be tougher for those that lack government shareholders.

Airlines have been guarded about the likely impact, with only Ryanair in Europe putting a number to it. Chief Executive Officer Michael O’Leary said last week that while the carrier is 80% hedged at $63 a barrel through next March, the unhedged requirement will cost it 50 million euros ($55 million).

Clouded Outlook

While analysts still expect most European airlines to make a profit in the year ahead, those estimates don’t include the latest surge in crude. Hedges are much less robust in the second half, suggesting a greater financial hit if the crisis persists.

Air France-KLM, for example, has 72% of first-quarter consumption hedged and 63% for the following three months, according to an earnings presentation last month. But the proportion drops to 42% and 28% for the third and fourth quarters respectively.

Lufthansa said Thursday that the war has clouded prospects for a recovery and makes it impossible to provide an earnings estimate for 2022. The carrier is hedged on 63% of its fuel needs for 2022 at $74 a barrel.

Wizz’s newly placed hedges cover 50% of its March fuel requirement at $1,172 per metric ton and 40% of needs for the first quarter through June at $1,142, compared with a March 7 spot price of $1,300. 

Its capacity for the next two quarters will be 30% and 40% above 2019 levels, after earlier targeting 50% growth by summer, Sanford C. Bernstein analyst Alex Irving said in a note. Wizz said it will continue to focus almost two-thirds of seats on central and eastern Europe.

Asia Vulnerable

Most Asian carriers, including those in China, also aren’t protected against oil price increases. After reporting huge losses in 2008, many airlines in the region reduced or abandoned hedging policies.

Among the few that still hedge are Cathay Pacific Airways Ltd. and Singapore Airlines Ltd., though they reduced their exposure after the pandemic wiped out travel demand.

As tough as the operating environment is becoming for global airlines, Russian flag carrier Aeroflot faces an even starker future, with many overseas routes cut off and sanctions hitting its supply of new and leased planes.

©2022 Bloomberg L.P.