U.S. Airline Executives Unconcerned by Rising Oil Prices — For Now

Photo credit: Austin Airport and Skyline Austin-Bergstrom International Airport / Austin Pro Photo

U.S. airline industry executives largely brushed off concerns that rising oil prices will put a dampener on their still-nascent recovery from the Covid-19 pandemic, confident in the resilience of summer demand to absorb higher fares.

In the immediate aftermath of Russia’s invasion of Ukraine last month, oil surged to more than $130 per barrel, breaking through the $100 per barrel threshold for the first time since 2014. Speculation in the early days of the Russian campaign ran rife that the surge would continue and oil prices could reach $200 per barrel or more if Russian supply — 10 percent of the world’s daily consumption — were to go offline.

But in the weeks since the invasion began, oil has floated back closer to earth. On March 15, prices for both Brent crude and West Texas Intermediate were hovering under the $100 a barrel threshold, with some analysts forecasting even more slippage as the market adjusts to its new reality. The factors informing the lower prices are many. Some oil-producing countries, like the United Arab Emirates, have signaled they will increase production. A new Covid lockdown in China is reducing demand for oil in that country. Energy traders have been loath to buy Russian crude — now trading more than $25 lower than Brent — for fear of falling afoul of sanctions, and that oil is finding new markets elsewhere in the world. And Iran and Venezuela could see sanctions eased, bringing their considerable reserves back online.

Meanwhile, demand for summer travel in the U.S. is soaring, based on advance ticket sales. Some carriers, including Alaska Airlines and JetBlue Airways, intend to fly as much if not more than their 2019 capacity this summer in response to surging demand. U.S. airline executives speaking at Wall Street conference believe the strength of demand, especially after the Omicron variant receded, will give them the flexibility to pass on higher fuel costs to passengers. They warn, however, that the situation remains fluid: The war could cause further price spikes, or a new coronavirus variant could stifle travel.

But from what they are seeing now, executives believe the rise in fares will be minimal. One way fares could rise $15-20, Delta Air Lines President Glen Hauenstein said at a JP Morgan conference on March 15. Summer demand is expected to be “robust,” and Delta thinks it will need to raise fares less than 10 percent to recapture higher fuel costs, he added. “We are very, very confident in our ability to capture over 100 percent of the fuel price run up in the second quarter, and probably over the summer.”

This increase is in line with what United Airlines is predicting. Chief Commercial Officer Andrew Nocella believes fares will rise less than 10 percent this summer to cover the rising cost of fuel. Fares lag the spot prices for fuel by a few weeks for domestic travel and by a month of so for international travel. “So far, we’re not seeing any demand destruction [due to higher ticket prices,” Nocella said. “And demand is really high right now and we’re bullish about the future, especially the next six months.”

American Airlines CEO Doug Parker was even more direct. “We can make money at oil prices of $100 [per barrel] or higher,” he said. The carrier, like United and Delta, is moderating near-term capacity, but this has as much to do with delayed aircraft deliveries from Boeing and staffing problems as it does with fuel prices, he added.

Southwest Airlines Chief Financial Officer Tammy Romo and JetBlue CEO Robin Hayes also attributed lower first-half capacity to staffing issues, rather than fuel. Hayes added that the carrier’s fare increases due to fuel will be “a little lower than Delta’s,” but he added the carrier is “extremely bullish” about its ability to recapture fuel increases as fares in the short- to medium-term.

Unlike the other airlines, Southwest hedges much of its fuel needs, and when oil hits $100 per barrel, the Dallas-based airline could reap up to $0.53 per gallon of jet fuel in the second quarter, and its gains only go up from there, Romo said. For the full year, the gains would be in line with the second quarter, if oil prices remain elevated. The carrier is 37 percent hedged for next year, and 14 percent hedged for 2024. “We are in a great position this year,” she said.

Alaska also hedges, but only about half of its needs, which gives the carrier the flexibility to ride out volatility in the oil markets without affecting is capacity plans, Chief Financial Officer Shane Tackett said. “This has always been about buying ourselves a little time,” he said, referring to the carrier’s hedge program. “We are in a good position for the next three or four quarters.”

Alaska plans to increase its capacity this summer to 2019 levels and still expects to be a larger airline by the end of this year than it was at the end of 2019, despite the surge in fuel prices, Tackett added. But he warned: “If fuel prices stay high for the next year, our advantage falls away.”