Ukraine conflict hits the Airline industry in the wing

The ease of rules related to the Coronavirus pandemic was making the airline industry look with optimism at 2022. But in the last week of February, the military conflict between Russia and Ukraine cast a big shadow over the travel and airline industry expectations for recovery. The sanctions imposed by the Western countries are already impacting travel and will create additional costs for the affected airlines.

Opinion by Bogdan Maioreanu, eToro analyst

After two years of Covid pandemic, with ease of restrictions in sight, the Summer of 2022 looked very strong for Europe and US airline and travel businesses. Bank of America estimated at the end of last year that due to recovery, pandemic ease and summer travel the demand for jet fuel might take the oil prices to 120 dollar per barrel. Two months later, oil is already close to 120 dollars per barrel but not due to overbooked planes but on concerns of supply disruption. Jet fuel price increased over 60% last year and is up 5.1% compared with last month. Fuel is 19% of total expenses for global airlines, before recent price spikes. Increasing the airline’s fuel costs just as they’re recovering from the demand destruction induced by the Covid pandemic might drive weak companies into the ground.

In January this year, the airline industry forecast for 2022 was considering a global airline revenue of $432 billion in the baseline recovery scenario, representing 65% of 2019’s revenue. By the end of the year, global air travel demand could recover to 84% of 2019 levels in the baseline scenario. A IATA – International Air Transport Association – forecast was showing that airlines all over the world are not expecting, while returning to normal operations, to reach 2019 levels before 2024. The current conflict does not allow a return to normal and has a huge potential to move back this goal.

The closure of EU, UK and US air space for Russian planes and Russia’s similar retaliatory measures are making travel routes longer and planes consuming more fuel, adding to their costs. Already airlines are canceling or rerouting flights. Germany’s Lufthansa group (LHA.DE) said 30 flights to Russia are canceled this week and flights from Europe to Tokyo and Seoul would have to fly detours. Air France KLM (AIRF.VI), Finnair continues to operate flights to Thailand, Singapore and Delhi using alternative routes that lengthen flight time by about an hour. Virgin Atlantic said avoiding Russia would add 15 to 60 minutes on flights between the U.K. and India and Pakistan, according to the BBC. Scandinavian airline SAS (SAS.ST) had also paused its Copenhagen -Tokyo service. Russia’s Aeroflot said it has canceled flights to the United States, Mexico, Cuba, the Dominican Republic and all flights to European destinations.

Shipping container shortages and port bottlenecks mean more products are being flown by air. Demand for air cargo last year was 6.9% above 2019 levels, according to IATA. Air cargo is most affected by the Ukraine situation, adding to the existing supply chain issues. Finnair (FIA1S.HE) and Virgin Atlantic have already canceled North Asian cargo flights over closed access to airspace, while other companies are trying to readjust their routes. But this comes with lost business and additional costs. Sanctions “by no means shuts down an air corridor between Asia and Europe. It just gets a little more complicated to fly it,” said a former cargo chief at Delta Air Lines (DAL).

This situation that is affecting the airlines in the countries imposing sanctions on Russia is creating business opportunities for others. The number of flights through Kazakhstan tripled and Middle Eastern carriers such as Qatar Airways, Emirates, Etihad, Saudia and Turkish Airlines increased their market share out of China, where they are already operating about 20 to 25 flights per week. Taiwan’s EVA Airways (2618.TW) said that its cargo flights to and from Europe are operating normally and it would consider adding more services to meet market demand. The Russian carriers, which make up approximately 70% of the flights between Russia and the EU are the most affected. Profiting on the grounded fleet of Russian AN124 and the destruction of the largest cargo plane in the world, the unique AN 225, Airbus (AIR.PA) is transforming its in house Beluga supersize jets into serviceable aircrafts offering logistics airlift for oversized shipments.