Jet fuel shortages threaten to disrupt the upcoming summer travel season as conflict in the Strait of Hormuz intensifies.
Nurfoto | Nurfoto | getty images
Peak travel season is almost here, but the head of the International Energy Agency tells CNBC that Europe may struggle to meet rising demand for jet fuel as the Middle East crisis continues.
IEA chief Fatih Birol said Europe needed to secure alternative sources of jet fuel such as the Strait of Hormuz, which previously supplied about 20% of the world’s oil., Remains closed.
“In August, demand for jet fuel is about 40% higher than in March, so demand will increase, and if supply is still where it is, the challenge may be even greater, but I fully expect Europe to import energy,” Birol said in a conversation with CNBC’s Steve Sedgwick. join live In Singapore on Thursday.
Refineries in the Middle East provide about 75% of jet fuel to Europe, but production from those facilities is “basically almost zero now,” he said.
“The rest is coming from some of the big Asian countries, where there are export restrictions now, and Europe is now trying to get it from the US and Nigeria. If we can’t get additional imports from these countries into Europe now, we will be in trouble,” he said.
European carriers are at greater risk than their US counterparts because the continent is more dependent on fuel imports.
Birol indicated that Europe may need to take some measures to “reduce air travel”, resulting in some airlines including Lufthansa and SAS already reducing flights.
Birol warned last week that Europe could run out of jet fuel within six weeks, with analysts issuing similar warnings. “We are facing the greatest energy security threat in history,” Birol told CNBC on Thursday.
Many European countries depend on the economic boost from increased air travel during the summer season. According to ACI Europe, air connectivity generates 851 billion euros (about $1 trillion) in GDP for European economies and supports 14 million jobs.
price increase, flight cancellation
Jet fuel prices rose 103% by the end of March compared to the previous month, according to International Air Transport Association.
“Airlines typically run on single-digit operating margins and spend 20 to 40% of revenue on fuel,” Alex Irving, head of European transport equity research at Bernstein, told CNBC, so “rising jet fuel prices push the industry into operating losses.”
Irving said the industry needs higher ticket fares to remain profitable, but it risks alienating customers. To support higher ticket prices, airlines will have to cut costs by cutting capacity and reducing flights.
Some airlines have already started cutting flights and routes. german carrier lufthansa Is 20,000 short haul flights cut by October, which will save 40,000 metric tons of jet fuel and reduce unprofitable flights.
Scandinavian airline SAS said this 1,000 flights canceled due to fuel costs in April, while Dutch airline KLM said it was reducing its capacity by 80 flights due to rising kerosene costs.
budget carrier easyjet It reported a core loss of between £540 million and £560 million ($675 million and $700 million) for the six months to March 31 and said additional fuel costs in March contributed £25 million. This indicated that bookings for the rest of the year are looking weak as customers wait until later to buy tickets.
The budget airline is hedging 70% of its summer fuel, with jet fuel priced at $706 per metric tonne. The rest is still subject to volatile fuel price movements. Irving said that, even if airlines hedged more of their fuel to reduce the risk of a volatile spot price, they would still need to cut back and increase fares.
Europeans may have to celebrate holidays closer to home
Stephen Furlong, senior transportation and logistics analyst at Davis, said airlines’ responses to rising fuel prices are all about “increasing profitability.”
“They’re reducing frequencies and high-frequency routes in some cases, because some routes don’t make sense at these high oil prices,” Furlong told CNBC. Airlines are also retiring older, less fuel-efficient planes earlier than planned, he said.
Another solution is to eliminate unprofitable parts of the business. Lufthansa announced on 16 April that it was closing its subsidiary Lufthansa CityLine. “To reduce further losses of the loss-making airline.”
Furlong said as uncertainty continues, customers may want to consider vacationing closer to home.
“We will likely see more demand for leisure travel closer to home, such as Spain, Portugal and France, as opposed to the eastern Mediterranean in the near future,” Furlong said.
