The Economic Risks Facing Airlines
In his presentation at the World Financial Symposium, Henk Jan Hoogendoorn, Chief Financial Sector Officer, Qatar Financial Centre Authority went through some of the primary headwinds.
Geopolitical turmoil is undoubtedly the main concern. Essentially, this has translated into an economic crisis, largely through rising oil and gas prices. In turn, inflation has risen, and consumers have less purchasing power. Demand is likely to suffer.
There are some hangover effects from the pandemic too. Most notable are ongoing travel restrictions in certain parts of the world and the concern that these may increase as the northern hemisphere winter hits.
Less obvious is how the attitude to flying has been affected. Zoom and other forms of online meetings and conferences have had a small influence but perhaps more pronounced is a growing environmental awareness.
Most observers believe this will continue to grow and individual airlines—and the industry as a whole—need to do more to make the public aware of aviation’s environmental credentials.
The high value of the US dollar will also have an effect for many airlines. Many costs, especially fuel, are incurred in dollars but revenues are often dominated by the local currency.
The exchange rate therefore has a negative impact on the bottom line. It also makes blocked funds more likely, which already exceed $1 billion.
It all means profitability is likely to be hard won. Costs will continue to rise. Labor costs especially look set for a steep increase. This is not only because of a lack of manpower pushing wages up but also because regulations are coming into force throughout the world that will keep salaries high.
But Hoogendoorn insisted all was not doom and gloom. Air cargo’s performance promises a potential uptick in revenues and there are some strong emerging markets, such as Rwanda. Together with the strong recovery, it has led to increased interest from funds to invest in aviation.
Hedging and sustainable aviation fuels
Clearly, with fuel such a major component of an airline’s cost base, hedging will be vital to avoiding red ink on the balance sheet. This was tackled in a follow up presentation by Daniel Colover, a Market Engagement Officer with Platts.
Airlines hedge to lock in a margin and protect against losses. This makes financial planning more accurate. Forecasts suggest the oil price will remain high throughout 2023, as will the crack—the difference between the price of crude and jet fuel.
The crack has been extremely volatile, turning negative during the early days of the pandemic, before reaching record highs as producers manipulated jet fuel production levels.