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How Are the Rising Costs Of Fuel Affecting Airlines?

Fuel price increases are beginning to hurt airlines, pushing some to cut schedules and others to warn of rising costs. Due to continued worldwide supply problems, jet fuel prices have reached 14-year highs.

For airlines, fuel is typically a significant operating expenditure. While it varies per carrier, fuel normally contributes for 15-20% of an airline's overall operating costs. However, recent price increases threaten to raise fuel expenditures to a higher proportion of overall operational costs. It gives airlines the choice of raising rates or seeking for savings elsewhere.

Sky High Prices

If filling up a car's tank sounds unreasonably expensive, consider the cost of fuelling an airliner. Some Boeing 737s carry almost 6,900 gallons of fuel, which would cost around $13,300 more than a year ago at current US Energy Department pricing. Delta Air Lines anticipates burning 750 million gallons of fuel in the first three months of this year alone.

“A 737 right now costs a little over $36,000 to fill up versus $24,000," Richard Manrgum, Aeronautics Professor at Kent State University, told Ohio-based news outlet WKYC. "An even larger aircraft like a 747 going from New York to London burns about 21,000 pounds of fuel, which is about $116,000 of gas right now."

Gareth Edmondson-Jones of Salt Lake City-based Breeze Airways estimated that increased fuel prices would add around $5 per passenger per hour to operational costs. "If it's a two-hour trip, an extra $10 in fare. If it's a four-hour trip, then $20. It's nothing we really want to do, but ultimately if fuel continues to go up, we're going to have to amend prices."

Major US Carriers Are Unhedged Amid Fast-Rising Fuel Prices

Some airlines have oil hedges that will help offset some of the price increases, while others, like United Airlines, American Airlines, and Delta Air Lines, are completely unhedged.

Air France, for example, has hedged 72% of oil consumption for the first quarter and 63% for the second quarter at $90 a barrel, with smaller amounts hedged in the second half. Similarly, Air New Zealand has hedged 1.34 million barrels of oil in the six months to June 30 and 707,500 barrels in the following half-year period.

Brent crude, a worldwide crude oil benchmark, has risen 26 percent since Russia invaded Ukraine on February 24. Singapore aircraft fuel costs have risen about 35% since that date. Bloomberg also reports that spot jet fuel rates for delivery in New York Harbor have increased by 76% this year to $4.06 per gallon.

Airlines To Cut Schedules

According to a Bloomberg report, owing to rising fuel prices, Seattle-based Alaska Airlines is reducing planned capacity by up to 5% in the first half of 2022. Also, Allegiant Airlines, based in Las Vegas, has indicated that they would reduce its second-quarter schedules by up to 10% due to increased fuel costs. According to the airline, it will do so by reducing capacity during periods of lower demand.

Meanwhile, other airlines are dealing with additional challenges. Southwest announced a 7% reduction in flights over the next three months due to employee shortages. Southwest executive Tammy Romo stated at the JP Morgan conference that the business aims to hire 8,000 new employees this year and is "in the process of adequately staffing."

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