Oil prices are shooting up. Will the cost of flying follow suit?
The war in Iran, which began on Feb. 28, has already disrupted the global supply of oil and its price. How might that affect the cost of an airline ticket? Here’s what to know.
Will airline prices rise?
Almost certainly. In fact, in some cases they already have.
“We have increased fuel surcharges on Europe (flights),” Annick Guérard, chief executive officer at Air Transat, said during the company’s first-quarter earnings call this week. “However, this is blended in the total price.”
Meanwhile, CBC reports that a spokesperson for Air Canada said pricing “has been and continues to be adjusted to reflect these higher fuel costs.”
How much will they rise?
Hard numbers are hard to come by, but Cathay Pacific shared information on its website this week, noting that tickets purchased in Canada would face a $101 fuel surcharge until March 17, rising to $202.60 on the 18th. Amounts for other regions also doubled.
John Gradek, an aviation management lecturer at McGill and a former Air Canada executive, said the data for consumers can be sparse.
“It’s sparse because aviation fuel pricing is something that’s really a contractual price between a supplier and an individual airline,” he said. “So it’s not something that’s in the public domain.”
He noted, however, that the cost of a barrel of jet fuel jumped 58.4 per cent between Feb. 27 and March 6, from US$99.40 to US$157.41.
How do companies manage their fuel?
Bulky and volatile, jet fuel is mostly purchased by airlines on a need-to-use basis, much in the way that consumers don’t usually have extra gasoline for their car besides what’s in the tank.
Gradek said an airline might look at the price of jet fuel between stops to save a little money.
“If I’m going from Montreal to Toronto to Vancouver and … Montreal’s price is cheaper than Toronto’s, I would fill the plane up to its gunnels in Montreal and not pick up any gas in Toronto, and go to Vancouver.”
But he noted that the price of jet fuel can fluctuate by the day, even the hour.
“The only time you get a lock-in price is when I say I’m going to be flying in tomorrow and I guarantee uplift of 100,000 litres on my airplane. Give me a price today for tomorrow. But they won’t give you a price if you want to come in on Monday or Tuesday, they’ll say call me on Sunday or Monday and I’ll give you a price.
“So the window for price setting is very narrow these days, less than 24 hours.”
How might prices change in the future?
“Do you know how long this Strait Of Hormuz thing is going to last?” Gradek asked rhetorically.
“I heard stuff last night that the price of oil could hit 200 bucks a barrel. I’m saying, well, that’s absurd. Well, you know, 100 bucks a barrel was absurd two weeks ago. So who knows where this is going to head?”
He added that at a certain point, passengers will balk at increased prices and refuse to fly. Airlines might even make that call.
“For every flight you dispatch, you lose money because the margins are so thin in the airline business — three to four per cent — and if you have a cost item that represents 30 per cent of your costs, and the costs have gone up 50 per cent, and that cost is immediately reflected on your cash flows … your financial guys are going to be looking at dollars being thrown out the window every time a flight leaves.”
He added: “It’s not going to happen tomorrow, but if it just keeps going for another couple of weeks … you’re going to see carriers start to thin out their schedules and start cancelling flights that are not full. And you’re going to eventually have aircraft parked and people laid off.”
What can consumers do?
Not much in the short term. But Gradek noted that once a ticket is paid for, the price can’t change. So anyone thinking of travelling in the near future might be advised to buy tickets sooner rather than later. Unless the prices go down again.
“That’s called risk management,” said Gradek. “What do you think the price of fuel is going to be on July 1?”
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