Fuel prices are at record levels, and that’s bad for airlines. It’s also bad for transportation to and from the airport and hotel It’s bad for heating (which means it’s bad for hotels in chilly weather). It means higher prices for travel, but let’s look at airfare first. Take a Boeing 777-300ER. Let’s say it holds 300 passengers.
- A full tank of fuel is around 48,000 gallons
- A 50 cent increase per gallon is an additional $44,000
- Or $80 per passenger
Now, that Boeing 777 isn’t going to burn a full tank of gas going to Europe. At around 2000 gallons an hour of fuel burn it might use 20,000 gallons of fuel, but that’s still an extra $33 per passenger or $66 roundtrip for a 10 hour flight.
Higher fuel prices don’t always translate directly into higher fares. Airfares are determined by both supply and demand. How many seats are available for sale, and what are people willing to pay for those seats?
You wind up getting higher fares over time because airlines can’t make money at current low fares. They cut back on the number of flights they offer, carrying only the passengers willing to pay higher prices. Put another way they don’t just say “we’re going to charge an extra $50 each way for the same flights we’re operating now.” That would mean fewer passengers and empty seats. Instead they withdraw seats until they reach the point they can fill the plane at the higher price point.
It takes time to adjust schedules. And people buy tickets a few months in advance. So fewer fares and higher fares take time to worth their way out. But higher fuel prices will translate as fewer airline seats and higher fares in the coming months. That’ll depress travel demand for Europe (demand is already limited for Asia).
‘Global uncertainty’ may depress international travel even more so – people ‘staying put’ when the world seems like a scary place – that phenomenon is likely to cut travel to Eastern Europe more than Western Europe or other destinations. That makes it more expensive to get there once airlines can adjust their schedules (but cheaper until they can do so) but it makes it cheaper to be there as hotels and other accommodations try to fill empty rooms.
A reader asks me what “happens to tourism if Russia cuts off fuel supplies to Western Europe. Will non-essential uses of gasoline and diesel be banned? Are cruise ships essential? Hotels? Airlines?”
Oil prices are rising already. We’ve seen some export bans from Russia, mostly commodities used for electronics. Putin is complaining about sanctions on Russia and then imposing his own sanctions on Russia, that he believes hurt others too. Russia could ban oil exports betting that higher energy prices would weaken Europe’s resolve on sanctions and that this would happen before Russia itself winds up in crisis. They’d also be betting that more production couldn’t or wouldn’t come from Saudi Arabia, Iran etc.
But they haven’t stopped selling oil. They need the money to fund war, but they also need it to avoid sovereign default. Russia’s credit is already downgraded to junk.
Fortunately for Europe we’re heading into a period where less fuel is used for heating (warmer weather). If Europe miscalculates and imposes rationing or price controls (their own policy response) then we have problems in travel. Otherwise travel just gets more expensive.
Gary,
As you know airlines typically hedge on fuel with commodity contracts to both lock in a lower price and also to ensure a steady, predictable price for financial planning purposes. Do you know which airlines have locked up lower pricing (at least for the near term like maybe through 2022) using commodity contracts?
AC
American, Delta and United do not hedge fuel although some European airlines do because oil is priced in USD. Delta does have a refinery near Philadelphia that reduced its price per gallon by more than 25 cents/gallon compared to American and United in the 2nd half of 2021.
It is also noteworthy that Gary used the 777 in his example; American and United each have scores of 777s in their fleets of both the -200/ER and 300ER models. Delta got rid of its 777s during its covid restructuring; the difference in fuel burn for a 200ER and the A330-300, Delta’s primary transatlantic aircraft, amounts to more than 15% which means that there is about a $10k difference in fuel burn on the same route served by AA or UA and DL. Delta is heavily using its A350s across the Atlantic this summer and they burn 30% less fuel than the 777-300ER.
Fuel will be much more costly and Hunter Keay, airline analyst with Wolfe Research, expects United will burn $6 billion in cash in 2022 while American will burn $4.4 billion based on $100/bbl oil – and we are above those levels.
Since I’m not running an airline, just buying tickets, I try to look for bargains where airlines are trying to fill planes so they can run efficiently. And $185/bbl oil is not impossible by next winter. So, since I’d like to travel in fall and winter next year, I’m finding those seams now and locking in. (If I needed to be at a certain place at a certain time, on short notice, this would be a different situation, but it’s not.) And RT business tickets Europe/NA at $1400 are a bargain any time. You just need to be flexible and know where to look.
Fuel prices are at record levels – the question is why. Economic activity is not at record levels. Worldwide production is unaffected. Inflation plays a small part.
China (and possibly India) will allegedly buy more Russian oil to lessen the impact of boycotts by western countries. If so, that means China’s (and potentially India’s) traditional suppliers will have more oil to sell. The price of oil should be set by global supply and demand irrespective of psychological factors.
Boycotting Russian oil shouldn’t reduce global supply. In fact, Russia will likely produce more oil if it can find customers and it will probably have to reduce its price. If the price of oil produced outside Russia goes up, that will reduce demand to some extent.
It is funny how even a projected increase in the price of oil causes prices at the pump to jump immediately even though the gas that comes out of the pump was purchased and refined before any increase in oil prices. On the other hand, when the price of oil falls or is projected to fall, it takes much longer to see pump prices decrease.
Biden asked big oil to refrain from using the current crisis as an excuse to price gouge. Fat chance.
Yup, just keep on screwing with the economy, how many people will take a flight to Europe wearing a freaking MASK? By the time this mask power play is over, we’ll be too old to go anywhere on an airplane. But that’s OK because the airlines and hotels will be going under one by one.
What John said! Plus one!
@John ” Economic activity is not at record levels.”
This is exactly wrong. Economic activity IS at all time highs (whether you look at Durable Goods orders, PCE survey, GDP, all are well above pre pandemic trend with Industrial Production about to reach that level as well).
Much faster recovery from Covid than fiscal/monetary decisions of the last 2+ years had baked in.
Gary, Over the past year American has been playing the capacity gem in a particular nefarious way. Multiple times I have booked flights and paid more to get the departure times I want only to have them cancel, (or “change”) the flight and put me on a less convenient, and what would have been cheaper, one. Classic bait and switch.
50 cents X 48,000 gallons shouldn’t the answer be $24,000?
Am I missing something?
Thanks Tim Dunn good info!
@credit analyst, Okay I stand corrected. So then Biden should get credit for a record setting economy, low unemployment and fast recovery from Covid.
All these sanctions against Russia have – predictably – failed to alter Russia’s behavior. Instead, their biggest effect is the collateral damage inflicted upon our own Western countries – higher inflation, worsened supply chain issues, added travel restrictions, and elevated geopolitical security risks.
@Marco No one really expected the sanctions to alter Russia’s behavior. It was hoped that the threat of sanctions might, but once Putin invaded, they had to be imposed in order to maintain credibility as a bargaining tool. It is a long game. It isn’t a question that Putin will put on a brave face, blame the West, and attempt to carry on. The question is whether Russia can remain solvent longer than the Ukrainians can hold on to their key cities. As for the collateral damage — the United States is a net exporter of fossil fuel energy. Sure, there is a collective cry to the heavens when Americans have to pay a bit more to fill up our ridiculously oversized and inefficient vehicles. However, higher oil and natgas prices mean more and higher paying jobs in this sector of the economy. As for Europe, they are better placed to realize that reliance on a geopolitical adversary for critical energy needs was a massive strategic blunder.
I have been looking ahead at late summer, early fall for a couple of TATLs (with flexibility to fly into about a half dozen EU airports), and have been seeing prices creep up, and little upgrade space. Currently the bottom seems to be around 3.6K to 4K business class RT. Saver award space also seems to have shrunk. TK is a bargain right now, but I don’t want to turn an 8-12 hour leg into a 20 hour one. I am glad I locked in my summer TATL on a saver award months ago.