Fuel prices and plane ticket prices | It’s only a matter of time before the rises

If the past is indicative of the future, travelers are about to take the hit from soaring jet fuel prices, especially since many airlines have yet to do anything to mitigate the impact of this rise in black gold.

Julien Arsenault
The Press

On at least three occasions over the past decade, there has been a correlation between jet fuel prices and ticket prices, we can see by analyzing data from the Index Mundi website (fuel prices) and from the airline company Cirium (prices of plane tickets).

“We have seen this many times,” says aviation expert and lecturer at McGill University John Gradek, who also spent 18 years at Air Canada, where he was notably head of pricing. Surplus is always determined by the impact a price increase will have on demand. »

For example, in the first six months of 2015, the price of jet fuel – the biggest expense for airlines – increased by around 16%. During that period, the average one-way price for an international flight from Canada jumped 23%, to around $405, according to Cirium.

This price does not take into account taxes and other charges, such as taxes and fees, which contribute to raising the price of a ticket. This is also an average. The prices could therefore vary according to the destination.

Crude prices have soared in the wake of sanctions imposed on Russia since the start of its attack on Ukraine. The price of a barrel of jet fuel has jumped 27.5% since February to reach US$141.70, according to the International Air Transport Association (IATA).

“We expect travel prices to be high for the summer due to demand and more limited capacity as well as additional pressure from rising fuel prices,” observes Paul Jacobs, Managing Director and Vice -president for North America at Kayak, in an email.

According to information provided by the travel search site, ticket prices to some international destinations – which have not been specified – have already increased by 36% compared to 2019.

After two years of pandemic, the taste for travel is likely to be there among customers, which could encourage carriers to pass on them a good part of the increase in crude prices, believes Mr. Gradek.

“The market can handle a little bigger upside,” he said. Everyone wants to travel. Airlines know this. »

For airlines, which are trying to recover from the health crisis, the situation is far from ideal. Soaring crude prices, combined with geopolitical uncertainty due to the Ukrainian crisis, could dampen the enthusiasm of carriers to add capacity.

Different strategies

Air Canada did not respond on Monday to questions from The Press. At Transat AT, a fuel surcharge is “something that is likely to happen”, according to its spokesperson Christophe Hennebelle. At WestJet, there are no “for now” increases.

To mitigate volatility, some airlines opt for hedging strategies. These consist of fixing the price of fuel at a certain level through futures contracts or other financial instruments. This reduces the impact of energy jolts.

Despite the uncertainty of recent weeks, Transat AT and WestJet have still not deployed this strategy, as has Air Canada as of December 31.

“I think the companies are crossing their fingers that the increase is temporary,” says Mr. Gradek. But with the situation [en Ukraine] which is deteriorating every day, there is no respite. Attitudes will surely change. »

According to the specialized site SimpleFlying, American Airlines, Delta Air Lines and United Airlines – three of the main American carriers – had also opted for the status quo. Conversely, Air France/KLM covered around 65% of its fuel expenses for the second quarter, according to Reuters. Elsewhere in the world, Lufthansa, Singapore Airlines and Cathay Pacific have followed suit.

But hedging strategies are a double-edged sword. If crude prices rebalance quickly, companies may find themselves paying more for some of their fuel because of their hedging strategy.

Each option has advantages and disadvantages. The fact remains that a marked rise in the price of black gold causes price increases, whether hedging strategy or not.