February 28, 2022/Fitch Ratings
The jump in oil prices to around $100/barrel following Russia’s invasion of Ukraine is a material near-term risk for airlines, Fitch Ratings says. Jet fuel represents one of airlines’ largest expense at 20%-30% of total costs. Most US carriers fuel costs are unhedged, while European carriers’ hedging ratios are generally lower than pre-pandemic levels. Travel demand also remains below pre-pandemic levels, possibly limiting airlines’ ability to offset fuel costs with higher ticket prices.
Airlines have proven their ability to stay profitable when oil prices were higher than current levels. However, margins and cash flows in 2022 will likely be weaker than we expect if crude prices continue to rise or remain high. Leverage and profitability metrics are already strained and projected to remain weak for existing ratings at least through 2022, due largely to the slow recovery in business travel and rising fuel and other costs.
Fitch does not expect any immediate negative action related to a jump in fuel prices, given good liquidity following the stockpiling of cash during the pandemic and recovering passenger traffic amid waning cases of the Omicron variant. However, a sustained period of higher jet fuel prices may prolong airline recoveries, which could pressure some ratings or delay positive rating actions.
The war should have minimal direct impact on demand for most Fitch-rated airlines. US and most European carriers have very limited exposure to Ukraine and Russia, while exposure for rated European carriers is not substantial.
A prolonged conflict could create some hesitancy around travel in Western Europe, but we do not anticipate a material impact at this point. We still expect pent-up demand to drive a recovery to the region this summer, but US domestic carriers remain in a stronger position than carriers with exposure to trans-Atlantic travel.
Airline cost structures are already under pressure, as carriers are still recovering from pandemic lows and are not yet flying at full capacity. In addition to soaring jet fuel prices, airlines are also experiencing upward pressure on wages and airport costs, while catching up on maintenance items deferred during the pandemic. Multiple airlines have reported recent increases to starting wages for lower-tier employees amid difficulty hiring in a tight labor market. The industry is also absorbing higher crew training costs as new employees are hired to fully staff operations that had been scaled down during the pandemic.
