The Jet Fuel Crunch Arriving Just in Time for Your Summer Vacation

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1:58For global airlines, this year was supposed to be a big one. The industry had projected record profits, more than 5 billion passengers, and a busy summer travel season. But then came the war in Iran and the closure of the Strait of Hormuz. And with it, a major disruption to global jet fuel supplies. There's been a lot of talk. Will we run out of jet fuel? Will we have to actually stop flying? Will my plane still take off? Benedict Kamel oversees Bloomberg's global aviation coverage from Berlin. He says the fears of a jet fuel shortage grinding air travel to a halt haven't yet come to pass. But the strain on supply has caused other problems.

2:44So far, the big problem for airlines is not so much the availability of jet fuel, but it's the cost of that that has really created such a massive headache for the airlines. For some airlines, it could be more than just a headache. Over the weekend, Spirit Airlines shut down after years of financial problems, citing rising jet fuel prices as the last straw. Meanwhile, other airlines are responding to their rising fuel costs by trying to make them up elsewhere. by passing them on to passengers. We've heard from multiple airlines across the industry that they've said that we think we can push more of that extra cost through to the consumer, 30, 40, 50, in some cases 100 percent, and that means higher ticket prices for everybody.

3:39I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, how the Iran war is putting a squeeze on airlines and passengers, and how rising jet fuel costs could reshape the aviation industry.

3:58The reason airlines are so sensitive to rising jet fuel prices is because fuel can make up as much as 30 % of their operating costs. Jet fuel is one of the biggest costs for airlines, and it's one of the things that they can't really control. And the only other really major cost that they have is personnel, but that is something that they can control more. So you can furlough staff, you can think of other creative ways that you can reduce that, but on the fuel side, you really don't have any manoeuvrability. You really can't do very much. And that's why that cost has really hit them right to the bottom line.

4:35And the only thing that they can really do is try and pass that cost on. And the easiest way to do so is to pass it on to the consumer. So people like you and I who will travel and who will suddenly find that the price of their ticket has gone up quite a bit. When you think about these rising prices, Benedict, how much money are we talking about for airlines? We heard from American Airlines that they expected by the end of the year to have additional fuel costs of$4 billion. So that gives you a sense. I mean, obviously, that's stretched over a long period of time. But that gives you a sense of just how much money we're talking about.

5:14And that also gives you a sense of just how difficult this will be to absorb and to pass on to the consumer. So all the major airlines reported earnings in the last couple of weeks. And the one big theme that has come out of this for all of them is the costs going up and we have to somehow pass them on. So we heard from United, we heard from Delta, we heard from American. And there's a great sense of uncertainty in the industry. If you think about the first couple of months of the year, there was a general sense of the demand is there, people are spending, people want to travel. That has gone out of the window.

5:51So since February 28th, since the war started, there's a lot more uncertainty built into this particular part of the industry and the global economy. And that can be felt in the commentary, can be read in the commentary from airlines. So some have said we are suspending our outlook for this year. Others have said we have to revise our numbers. But very few have actually said we still feel good about the rest of the year. The near term outlook seems OK for now. But as anyone's guess how things will progress. And everyone seems to understand that even if the war were to end tomorrow, the price of oil and therefore the price of fuel will not come down instantly.

6:32So that'll take time to then feed itself into the system again. We have disruption on the ground, both in terms of the supply chains, but also in terms of the infrastructure on the ground. There is damage from the war. Some refineries have been hit. That'll take time to repair again. So whatever happens next on the battlefield, as it were, it won't immediately lead to lower fuel prices and to lower ticket prices for the consumer. As we talk today, which markets have been hit the hardest? So Asia is hit fairly hard. They probably are the market that has the most acute shortage of jet fuel, and therefore that's a particular area of concern.

7:15But then if you look into the US, it's really sort of a tale of two types of airlines. You have those that went into this crisis already quite weakened, and then you have others that went into it with a fairly solid balance sheet. So the big three, United, American, Delta, they're probably in the best position to wade through this and come out of it fairly unharmed the other end. But then there are sort of the middle of the market carriers, the Jet Blues, the Spirits of this world that are obviously much harder hit. And then we saw over the weekend that Spirit Airlines had to actually wind down operations.

7:54And that was a direct result of the cost of fuel and the surge in fuel costs that we've seen. There were, of course, other factors involved in the Spirit collapse. They'd been losing money for a while. They filed for bankruptcy just last August. They were hoping for this$500 million government bailout, which they didn't end up getting. But fuel prices were a big factor. And as you mentioned, other middle market carriers are also feeling these strains. There's been speculation that JetBlue could be headed toward bankruptcy, though the CEO recently told employees they're not considering that option.

8:30But I guess I'm wondering, Benedict, could jet fuel costs put more carriers out of business? That is certainly a risk. And what happened to Spirit is emblematic of the wider issues in the industry that you have very little wiggle room, essentially. So if something goes wrong and you're already going into this weakened, then it's going to be very hard to survive it. And that's certainly the case for Spirit. So it really separates the stronger players from the weaker players. Whether other airlines will go bankrupt is impossible to say at this point. We heard from the Transport Secretary Sean Duffy yesterday that he doesn't think that others will be in direct jeopardy, that others will have to declare bankruptcy.

9:11See, at the same time, we know from some of the smaller players in the market, the frontiers and so on, that are going to the government and saying, could we count on you for some form of assistance should the going get tougher? Spirit probably in a unique position already weakened. And that ultra low cost model was already really struggling. So they probably only needed that last encouraging nudge to tip them over the edge of the cliff. What that means for others is too soon to say, but it's certainly not going to get any easier for other carriers. So, Benedict, you mentioned the Asian market, which saw these impacts first.

9:50We talked about the U.S. I want to turn now to Europe because the head of the International Energy Agency recently said that the continent has only about six weeks of jet fuel remaining before shortages begin to take effect. What could a shortage look like for Europe? That was quite an alarmist comment from the head of that agency. And some airlines have sort of gently pushed back on that and said, look, the outlook is always four to six weeks in terms of what we can see in terms of supply. Yes, fuel is expensive, no doubt about it, but we don't actually see a shortage. So there are strategic reserves that they can tap.

10:27They are looking to other markets. And then there is what is called sustainable aviation fuel, which is an alternative source of fuel that was all a rage a couple of years ago, then sort of fell out of favor a bit because it was expensive and it wasn't available in enough quantities. And now, interestingly, given this crisis, airlines are taking another hard look at this and seeing, OK, can I get my hands on more sustainable aviation fuel that is not kerosene and not oil based? And might that sort of help me over the hump in the short term?

11:05So how might airlines adapt to the longer term impacts of the jet fuel squeeze? That's after the break.

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13:22As jet fuel costs rise, airlines have been trying to pass those costs on to consumers. And Bloomberg's Benedict Cammell says some airlines are also rethinking their routes. Some airlines are taking a hard look at what they're flying, how many routes they're doing, and they're taking out some capacity. That is one thing that airlines can do. They can take a hard look at their route network and think about, do I really need to do this route? Do I really need to take this flight to a secondary or a tertiary airport that might have been nice to serve previously, but is not mission critical? So we are seeing that they are strategically taking some routes out of the network.

14:05That means they're consuming less fuel and that probably helps the bottom line of the demand as well. How are we seeing different governments around the world stepping in and stepping up at this moment? Are there policy interventions or governmental interventions that are poised to help the airline industry weather this moment? Well, the most obvious one was President Donald Trump musing whether the government should take over Spirit Airlines. And there was considerable opposition even within the Trump administration and the wider government whether this is a good idea. This is an airline that was already in trouble.

14:44there are a lot of people saying that the US government should not be in the business of owning an airline, whether it's a solid and healthy one, or whether it's one that many people would say is a zombie airline at this point. So in the end, we know how it ended, no deal, and then therefore the collapse. So that is sort of the most obvious way in which a government has stepped in. Over here in Europe, the airlines have lobbied with governments to alleviate some of the burdens, be it taxes, that kind of thing. But nobody's outright asked for governments to intervene and to prop up airlines. So that hasn't really been the case other than spirit.

15:22And the same is the case in Asia. So we're in a bit of a holding pattern at this moment and in a wait and see moment to see, okay, what can the airlines do proper? What can the industry do before they go cap and hand to the government? And so at the moment, it's more sort of on the fringes and on the sort of regulatory side and on the cost side, shall I say, wherever the government can alleviate things, but less so in terms of actually taking ownership of an airline. In terms of what the industry can do, are they looking at supply alternatives outside of the Middle East, like in the US and Canada?

15:58And realistically, how quickly could those supply chains get up and running? Well, that's a hard lesson that Europe in particular learned after the Russian-Ukraine war, sort of how quickly can you wean yourself off the existing supply chains? How quickly in this case could Europe, and in particular Germany, wean itself off Russian gas? And the answer is these things take a while. It's a complicated, complex network that has grown over decades, and it's very difficult to plug holes that come up and to go elsewhere. The jet fuel that is supplied in the US is slightly different from the one that is supplied in Europe.

16:38So there are complexities built into all of this that don't make it that easy to quickly switch from one supplier to the other. The most obvious thing that airlines can do is to look at their bottom line, is to look at their fleets, is to look at their cost base, and to think hard about where can I be more frugal? How can I make sure that I don't fly to certain markets where there is a risk that jet fuel is in scarce supply, and therefore my aircraft might be stuck there. So some airlines are taking a hard look at some markets in Asia and thinking, well, maybe I don't want to fly there because I do want to be able to come back.

17:15So that is essentially what airlines are doing for the time being. But again, there are those out there who say the airline industry has learned over the years and over past crises, be it the 2008 financial crisis, be it 9-11, be it Corona, they have managed to adapt and they've always come out the other end. That's the more optimistic view that leaders in the industry like Tim Clark, who runs Emirates and who's run that airline for a long time, he takes that kind of a view, which is give us a bit of time and we'll be just fine. As you mentioned, Benedict, airlines are passing some of these costs on to consumers, right as the busy summer travel season starts up.

17:56I'm wondering if you can break down where these price hikes are showing up, because it's not just rising ticket prices, right? It's not just that. That's the most obvious one. But airlines are also getting creative when it comes to the more, should we say, hidden costs. So adding a fee to the bag that you check in that previously might have been free. Lufthansa, for instance, the airline here in Germany, they recently did that. or making it more complicated for you to add certain sort of perks that, again, might have been free previously, getting rid of certain flights that might have existed previously.

18:30We just heard from Reiner that they are shutting some bases and saying this is no longer cost efficient. That means less choice for consumers. So the bottom line is your ticket will get more expensive. The things you can do with the ticket that you previously booked are going to get more expensive or are going to go away. and your flight might disappear. So the ticket that you booked or that you thought you would book might no longer exist. So fewer choices at a higher cost is sort of the bottom line. And could some of the changes to the consumer air travel experience stick if and when jet fuel prices come back down?

19:10Well, I mean, if there's one thing that we learned is that once you've gotten the consumer used to something, it's hard to reverse that. That means once you've sort of trained the consumer to accept higher prices, why go back? You know, once you've trained the consumer that they need to pay extra for certain things, why go back? You have to remember this is an industry that doesn't have lavish profit margins. The profit margins in the best of times are relatively thin. If they find that this is something that has stuck and there's no outward rebellion and there's no change in consumer behavior, then why go back?

19:48The good news for airlines is that the demand is there, and particularly the demand for the sort of higher price tickets is there. One thing that we've noticed since COVID is that people are upgrading, people are moving more to the front of the cabin, people want to be treated better, they want to fly better, they're populating the lounges, they're buying premium economy, they're buying business class tickets. That is something that It is still very much intact, that trend. So airlines are probably thinking, well, let's do this now while we can and while there still is demand. But you have to remember, we're going to come out of the peak summer period in what's called the shoulder travel season.

20:28And that's where demand is weaker. And the real litmus test will be during that time. You can get higher prices whenever everybody wants to travel. But getting high prices pushed through the market at a time when demand is slim, that's going to be the real test case for the industry.

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