Why Air Travel Costs Will Continue to Rise

0:05The war in Iran has sparked the most intense global energy shock in decades. And one big tangible effect for people outside the region is the jet fuel crunch. Airlines worldwide are taking some extraordinary measures to keep flying and stay in business. A warning for anyone hoping to travel for the summer holidays. Europe may run out of jet fuel. So many folks are trying to take those summer trips. We're talking about double-digit airfare hikes in the months ahead. The Iran War has had a pretty significant impact on air travel. I mean, there's routes that airlines are no longer flying because, you know, they could potentially be dangerous.

0:48You know, planes are having to sort of route around this Mideast airspace. We spoke to a couple of reporters who've been following this story, including Allison Sider, who covers airlines. The big question for airlines is how are they going to manage just billions of dollars in added jet fuel costs?

1:11Airlines are now scrambling to figure out how to secure fuel supplies and deal with increased expenses. Their fuel bills doubled in a matter of weeks. and it's not a super high margin business. So somebody has to pay that bill. And in a lot of cases, it seems like it's going to be customers who will be paying higher ticket prices.

1:36Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Monday, April 27th.

1:49coming up on the show the jet fuel crisis and what it could mean for your summer travel

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2:38The problem we're talking about here is jet fuel. But isn't the issue that oil is stuck in the Strait of Hormuz? So what's the difference? Oil is crude oil. Okay. That's what comes out of the ground. Our colleague Matthew Dalton covers the geopolitics of energy. Jet fuel is what's refined from crude oil, and it's transformed into jet fuel in huge factories that crack open the crude oil molecules, strip them down, and clean them into something that can be put into a plane. And the Persian Gulf, as it happens, supplies a lot of crude oil, but it also supplies a lot of jet fuel, refined jet fuel from refineries that are on the wrong side of the Strait of Hormuz right now.

3:28So, you know, the impact on the industry has both been because crude oil has not been available from the Gulf. It's also because jet fuel itself from refineries on the Persian Gulf has not been available. Matthew says the regional consequences of the conflict quickly became global. Since the Strait of Hormuz has been closed due to the conflict, about 20 % of the world's jet fuel has not been able to get to global markets and pass through the Strait of Hormuz. And that has been a big problem for the jet fuel supply for airlines. Okay, so if some of the jet fuel, 20 % of jet fuel is coming out of the Gulf, where does the rest of it come from?

4:15China is a big importer of crude oil, but they are a huge refiner. So they do actually end up exporting a lot of their jet fuel. But since the crisis has started, they've been stopping exports and keeping production at home for their domestic airlines. And how significant is that? Well, I mean, in Asia, that's been a big problem for regional carriers. Countries like Vietnam and Myanmar have had to slash operations. In Pakistan, airlines have been told to fly in with as much fuel as possible so that they don't have to refuel much to take off again because the Pakistani authorities don't want to stress their jet fuel supplies.

4:57So like that's that's been a knock on effect of China as well, because China is such a big exporter in the region or was. — And it's not just jet fuel exports out of China that have had an impact. Asian economies also buy about 85 percent of the crude that passes through Hormuz. Without that oil, other refiners in the region can't produce jet fuel either. — And if they can't replace that crude, you know, in relatively short order, one of the things they would do is just, like, you know, ramp down production, maybe not shut the entire refinery, but shut some units.

5:36On the other side of the world, in Europe, authorities have said that there's a ticking clock on the remaining jet fuel supply. A few weeks ago, Europe's airport industry body warned that if the Strait of Hormuz did not open, you know, within the next three weeks, that shortages were a possibility in Europe. The authorities have been doing things to monitor the flow of jet fuel around the continent, and refiners have switched their dials to max jet fuel production mode. Right. I was actually at Europe's largest refinery. It's the Purness Refinery in the Netherlands that's owned by Shell. And they can produce a number of different fuels.

6:19They can produce diesel, jet fuel, gasoline. And they were on the jet fuel max setting. How long might it take for the jet fuel supply to get back to where it was before the war? Well, supposing there's a permanent ceasefire and that as part of this ceasefire, Iran is allowing free passage through the Strait of Hormuz, assuming that that happens. Then there is some jet fuel sitting on tankers in the Persian Gulf right now, and that is sitting in storage facilities in the Persian Gulf that will need to be shipped out. And then these refiners need to ramp up their production again. You know, for the flow to get back to normal, it would probably take more than a month if all the geopolitics have been completely sorted out.

7:15The upshot of all of this is that the soonest that the global supply is likely to return to something like normal is, optimistically, summer. And in the meantime, Matthews says a lot of the world is buying their jet fuel from another big producer, the United States. The United States is actually, as a single country, is the world's largest producer of jet fuel by a long measure. So the United States, when it comes to energy, is in a good position here. The United States is the jet fuel superpower. But it is a global market. And what happens in the Middle East affects the United States, not because there's a threat of shortages, but because there's significant upward pressure on prices because of this conflict.

8:07And who's feeling that pressure the most right now? Anyone buying a plane ticket. That's next.

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9:26As much of the world starts to ration their jet fuel usage, when it comes to airlines in the U.S., they're more focused on the cost of fuel. For airlines, the most acute impact that they're feeling is in the price of fuel. Jet fuel prices have just skyrocketed since the war began. Since the conflict began, the price of jet fuel has more than doubled to a record high of over$200 a barrel. That's a huge issue for airline companies because jet fuel makes up about 25 % of their expenses. Our colleague Alison Sider again. I mean, it's typically like their second biggest expense after labor. So it is one of, and sometimes their biggest expense.

10:14So how much more are airlines expecting to spend on fuel this year? It's a lot more. I think American Airlines said that their fuel bill is going to be$4 billion higher. $4 billion higher just this year? Yes. Wow. It's a lot more money. And the brunt of those costs will go to the consumer. For the U.S. airlines, especially the really big airlines, the vibe is kind of like it's a big deal, but they're managing. Like they feel really optimistic, actually, that they can manage these high fuel prices by charging higher ticket prices. And that there's so much demand for air travel that people will just pay it.

11:02And how much have airlines raised ticket prices so far? There have been, you know, five pricing increases in the last couple of weeks that airlines have put through. And they say that they're holding and there's a sixth one kind of underway right now. So ticket prices are already up like 20 percent right now. And they seem pretty confident that by the end of the year, they'll be covering, you know, almost the whole run up in fuel prices, if not all of it, through higher fares. And is it just those fares that are going up or are consumers going to see higher costs anywhere else? Yeah, I mean, the big one that we've seen in the U.S.

11:37is bag fees. I mean, at this point, they've tacked another$10 on to the bag fee. And, you know, I think we can sort of expect that's here to stay. We have seen fuel surcharges. That's pretty much, you know, that's a lot by foreign airlines or on international routes. That's where that really appears, just adding an extra surcharge to cover the cost of fuel. Beyond making flights more expensive, airlines are also starting to offer fewer flights. There might be fewer flight options. We're starting to see airlines cut back capacity because they're just no longer going to fly unprofitable routes. A route that wasn't making money, you know, at$2 a gallon jet fuel is certainly not going to be making money at$4 a gallon.

12:24Are airlines right, though, about travel habits? Like, will people just keep traveling even if it gets more expensive? You know, I think it really depends what else is going on in the macro economy. Right now, airlines are saying the economy still seems fairly healthy, especially for kind of the upper echelon of consumers that a lot of the airlines have been focused on. You know, the people who will pay to sit in premium seats or business class seats. They're still wanting to get out and travel at the moment. You know, but we've had airline executives acknowledge in the last couple of days, like, at some point, you know, fares are up 20 percent and may go up from here.

13:07Like, at some point, you have to imagine that does start to cut into demand. They haven't seen it yet, but that is what you would expect at a certain point, that people will think twice about a trip or if they're feeling less well off in other ways. But so much depends on the rest of the economy. Right. Like, how much is the consumer willing to eat? to be able to go on a summer trip. Yeah, and right now the airlines are saying, like, yeah, we think it will come, that it would make sense to us if people pulled back given these higher prices, but we're just not seeing it. So until we get to that point, I think they're feeling pretty good, some of them.

13:45Right. Willing to play chicken with the consumer. Yeah, exactly. You know, for now, airlines are saying their bookings are, they're really happy with them. But we could start seeing that show up more and more as the summer goes on. And another place that this might show up more, and we'll hear more from the budget airlines as they report their earnings, you know, they really target a customer that is a little bit more price sensitive. And we might start seeing it show up more with some of those airlines. One of those budget carriers is Spirit Airlines, which is already in trouble even before the spike in fuel prices.

14:22The first real domino to fall is Spirit, which was in bankruptcy for the second time in less than a year, like a really vulnerable airline to start with. It had an agreement with its creditors to come out of bankruptcy, and that agreement has just been sort of totally upended by fuel prices. And that's why we're seeing Spirit kind of in talks with the government for a bailout. President Trump reportedly thinking about invoking the Defense Production Act as the legal basis to save Spirit Airlines. Proposed big government bailout for Spirit Airlines worth half a billion dollars. Still, airline stock prices across the board have taken a hit over the last few weeks, in part because the longer the conflict goes on, the longer fuel prices will stay high.

15:09Do you feel like prices will eventually go back to the way they were if things settle down in the Middle East? Well, that's sort of the big question. You know, historically, yes, they do come back down if, you know, if demand starts to ease off, you know, which which might happen. The airline executives who've been asked about this over the last week are actually kind of hopeful that it won't happen. You know, they think airfare has been like an incredible deal over the last couple of years. It just hasn't gone up as quickly as inflation. And, you know, they think prices deserve to be higher, basically, and would like them to be higher.

15:45So they're kind of hoping like, yeah, all this capacity, all this, you know, these unprofitable flights are going to come out of the market. Weak airlines might either go out of business or get acquired or might just have to shrink a little bit. So there will be less supply and demand is still good. So maybe fares will stay high this time. You know, that's not a message that consumers love to hear, but it's definitely something their investors like to hear. So that's what they've been talking about on the earnings calls the past week, that maybe this time is different and these higher fares are here to stay.

16:19So it's interesting, at least for U.S. carriers, it doesn't sound like this is a moment of anxiety at all. It's more of a moment of opportunity? I think some of them do feel that way, that this is something that they believe is very manageable for them. And I think we're seeing a test of how the airline industry has changed over the years. that there's been a lot of mergers, there are fewer airlines than they used to be, and they sort of pride themselves on being more disciplined, not engaging in a race to the bottom on pricing. Some of the airlines, at least in the industry, are a lot financially healthier than they've really ever been, and that this is a crisis that is very manageable to them, given the way that this industry has changed.

17:02I think we will test the limits of that, and we will see carriers that are in that position and carriers that aren't.

17:13If I'm a traveler, though, which, you know, I am, like for a consumer, if a consumer asked you, hey, Alison, you know all about airlines, should I book travel for the summer right now, what would you say? I don't think ticket prices are going to go down for a while. And, you know, unless fuel prices sort of very sharply decline and even maybe not then. I mean, we might not see fares come down immediately then. So I think if you want to travel this summer, I would say it's better to book earlier rather than later. So it's like it's a good time to act because prices might go even further up. Yeah, I mean, a better time to act would have been two months ago.

17:53But your options are not getting better.

18:04That's all for today, Monday, April 27th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Ben Katz.

18:18Thanks for listening. See you tomorrow.

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