Airlines in ‘stand-off’ over price cuts as jet fuel costs ease
Carriers are keen to protect the fare increases they brought in after start of Iran conflict
Airlines are locked in a “stand-off” over whether to cut ticket prices as jet fuel costs that soared during the Iran war begin to ease.
With the industry looking to maximise profitability amid a chaotic year, “they’re all hoping nobody blinks first and lowers prices, creating an aggressive fare war in late summer bookings”, said Rick Lewis at BCG. “It’s a stand-off.”
Air fares remain high, buoyed by fuel surcharges introduced after the start of the conflict. If one carrier cuts, others will be forced to follow to remain competitive, and airlines stung by higher fuel costs are watching rivals closely.
“We’re a low-margin business,” said Ben Smith, head of Air France-KLM, pointing to the carrier’s single-digit operating margin. “Where we have an opportunity to maintain [pricing], we would like to maintain that as best we can,” he told the FT.
The north-west European jet fuel benchmark hit $1,900 a tonne after the Iran conflict began in February, but has remained volatile and is trading at about $1,300, according to pricing agency Argus Media. Brent crude is trading just below $90 a barrel after topping at $114 in March.
European airlines have been partly protected by hedging, unlike their US rivals, which do not hedge their fuel purchases. But all carriers have been hit by the sharp rise in fuel, their largest cost, with higher fares and other cuts offsetting only part of the increase.
Historically passengers, especially those in economy, have been incredibly price sensitive, making it hard for airlines to increase ticket prices. But travel demand has remained high after the Covid pandemic, and this year there has not been a discernible drop in demand despite fares ratcheting up, said executives.
Ben Minicucci at Alaska Airlines, which this year opened its first route to London’s Heathrow, estimated passengers were “maybe paying 10 to 20 per cent more” than a year ago. “We’re very sensitive and attuned to whether we hit a tipping point with the customer,” he said.
Part of this is that air fares have been kept low relative to inflation. “If some of these [ticket]prices stick to where we are, and fuel goes back to where it is . . . it could be very good for the airline industry that you’ve got some price stickiness,” Minicucci added.
Even low-cost carriers saw the same trend. Malaysia’s AirAsia — which does not hedge jet fuel — raised prices by around a third, but “demand only dropped about 10 per cent, which was very encouraging”, chief executive Tony Fernandes said.
Despite the relatively resilient demand and falling jet fuel prices, some airlines are still cutting capacity in a year that the industry’s profitability is expected to halve because of the crisis, according to estimates from the International Air Transport Association.
Luis Gallego, head of British Airways owner IAG, said: “Pricing is not only linked to fuel price, it’s also about capacity, about demand. We are reducing capacity this year.”
IAG — which also owns Iberia, Vueling and Aer Lingus — is considering its capacity levels for the final months of the year. “Others are doing the same, so at the end, the pricing is going to be related to the capacity that we have in the market,” he added.
Some airlines that compete directly with Gulf carriers — which are notoriously aggressive on pricing — are using their direct routing as an edge to maximise ticket prices.
For example, European passengers were still willing to pay a premium to fly directly to Australia — albeit often with a fuel stop — compared with flying more cheaply and changing planes in the Gulf, said Qantas chief Vanessa Hudson.
Some in the low-cost market believe price cutting could be a chance to scoop up customers: Malaysia’s AirAsia plans to cut prices back to 5 per cent above its prewar levels. “We want to go back to where they were,” said Fernandes.
In order to recover some of the losses from the jump in fuel prices, the carrier will need to keep fares elevated for a while, but “we’re going to be heading down towards those kind of lower [prewar] fares”, he said.
Ultimately, much of the airlines’ decisions on fares will be driven by competitors, from traditional peers that raised prices, to Gulf rivals such as Emirates and Qatar Airways that are cutting fares to win back customers.
The Gulf airlines were “extremely aggressive,” said Smith at Air France-KLM.
Their need to attract visitors to the region rather than make a profit meant they did not “always act rationally,” he added, complicating the sector’s efforts in balancing the books during a turbulent year. “We have to deal with those as well”.