Grounded planes, plummeting demand and the skyrocketing cost of oil could risk bankrupting airlines within a matter of weeks, a Dubai-based billionaire has warned, with no clear end to America and Israel’s war against Iran in sight.
Gediminas Ziemelis is the owner of the world’s largest aircraft, crew, maintenance and insurance (ACMI) provider, Avia Solutions Group. Major European airlines typically come knocking in early spring (autumn in Australia), leasing planes from Avia’s 145-strong fleet to accommodate the millions of tourists who flock to the region between June and August.
It’s a level of demand the firm is yet to – or may not – experience this year, the Lithuanian businessman told Bloomberg. Bookings are “significantly lower” compared with previous seasons. Plans are underway to move the bulk of Avia’s jets from Europe to Asia and Brazil.
“We need to be ready for any area, district, jurisdiction and geopolitical risk,” Mr Ziemelis, who has amassed an estimated fortune of $US1.5 billion ($2.17bn), told the publication.
“If (the war) lasts more than one month, we may see potential first bankruptcies of airlines across the globe,” he added.
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Soaring fuel prices are mostly to blame, Mr Ziemelis said, representing about 25 per cent of the total cost of running an airline.
Oil prices have almost doubled since the conflict began on February 28. After Donald Trump dashed hopes on Thursday of a quick end to the war – reiterating that US forces would hammer Iran for another two to three weeks and bomb it “back to the Stone Ages” – prices surged again.
America’s main oil contract, West Texas Intermediate, jumped 11.6 per cent to $US111.71 ($161) per barrel. International benchmark Brent North Sea crude rose 6.7 per cent to $US107.86 ($156) per barrel.
Airlines triple fuel surcharges on international flights
Earlier this week, Taiwanese airlines announced they would raise their fuel surcharges on international flights by 157 per cent. Surcharges on short-haul flights increased by $US27.50 ($40) to $US45 ($65), and $US71.50 ($103) to $US117 ($169) for longer trips, the Civil Aviation Administration (CAA) and transportation ministry said.
China Airlines and Eva Air confirmed that passengers will be affected by the hikes from April 7.
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“In response to international trends, prices often go up and down, so we need to make appropriate adjustments to reflect that,” CAA director-general Ho Shu-ping told parliament.
Several Chinese airlines, including national carrier Air China, also plan to raise their fuel charges from this Sunday, April 5.
Qantas, Air France-KLM, Air India and SAS have already raised their fares to reflect the increase in jet fuel prices.
“We are continuing to closely monitor the impact the conflict in the Middle East is having on the volatility in jet fuel prices, which have risen by up to 150 per cent over the past fortnight. Despite hedging, this is driving up costs across the Group,” Qantas said in mid-March.
Cost increases will vary by route, the airline said.
A Virgin Australia spokesperson also confirmed to news.com.au that ticket costs had increased.
“Costs across the aviation sector continue to rise, now significantly exacerbated by the situation in the Middle East,” the spokesperson said.
“We are making necessary fare adjustments to reflect these cost pressures.”
“It’s not that (airlines) want to make huge profits,” University of Sydney Transport Professor Rico Merkert told The Guardian.
“It’s pure survival for some of them.”
The Australian Competition & Consumer Commission (ACCC) has put airlines on notice, warning it would crackdown on any carriers failing to properly reimburse travellers or increasing fares too much.
“While market conditions will ultimately determine the cost of flying, we are closely monitoring price movements, market behaviour and the airlines’ representations to consumers,” ACCC Commissioner Anna Brakey said.
“(We) will act if there is behaviour that contravenes competition and consumer laws.”
The longer the conflict continues, however, the harder the hit to travellers, Ms Brakey said.
“If jet fuel prices remain elevated for a prolonged period, airline costs may increase and this could ultimately lead to higher domestic airfares,” she said.
Airlines ‘working it out as they go’
On top of implementing additional surcharges, Mr Ziemelis told Bloomberg that airlines could be forced to abandon some flights.
Major carriers including Emirates, Etihad and Qatar have been forced to cancel thousands of flights through key hubs such as Dubai, Abu Dhabi and Doha over the past month.
Aviation Projects managing director and principal consultant Keith Tonkin told news.com.au that while going on holidays and heading overseas will still be part of our lives, it may look quite different in the foreseeable future.
“Right now, Australian international flights are looking a week ahead and working it out as they go,” Mr Tonkin said.
“It’s just a matter of keeping an eye on things and having a plan. There is absolutely a bit of uncertainty. In the longer term, I expect that will resolve, but I can’t see how that is going to happen at the moment.
“Right now, it feels like the problems are getting bigger, not smaller.”
Though flight prices appear to be surging, Mr Tonkin predicted airlines will likely be mindful not to raise the cost of tickets too dramatically, or they risk having to cancel flights altogether if not enough people buy them.
“I think the airlines will be very sensitive before raising ticket prices too high, because people won’t want to pay that,” he said.
“They will definitely be scrutinising the management of each flight and each route that they’re flying.
“I suspect travellers will also be very thoughtful about booking tickets when there is a lot of uncertainty.
“We just don’t know how far the situation is going to spread.”
Though it’s unlikely ticket prices will go down anytime in the near future, travel expert at Finder Angus Kidman said airlines will not be able to sustain hugely inflated costs forever.
“We won’t see super-cheap flights on routes to Europe, given that reduced capacity means airlines can fill those seats fairly easily,” Mr Kidman told news.com.au.
“But longtime super-high prices won’t work for airlines either, given that competition is still strong on many routes.”
Reporting with AFP and Jasmine Kaslauskas
