Thanks to the US-Israel war on Iran, filling up your car with petrol costs about 40% more than it did in February, and for diesel vehicles it’s closer to 80%.
But even those painful increases pale in comparison to the extraordinary rise in the price of jet fuel, which has climbed by a 125% since the start of the Middle East conflict.
This increase dwarfs the last global energy shock that followed Russia’s invasion of Ukraine in early 2022. Jet fuel peaked at about US$155 a barrel in June of that year; now it’s trading at US$210.
Johnathan McMenamin, a senior economist at Barrenjoey, said the explosion in refining margins – the difference between the price of jet fuel and crude – was due to the big Asian refiners struggling to operate with falling oil supplies.
Graphic comparing price of jet fuel and crude oil
McMenamin said: “They have less crude coming into their refineries so they have to reduce their capacity. And when they have less product to refine, they produce less jet fuel. But demand is not really adjusting.”
In other words, resilient demand for jet fuel matched with constrained supply has led to the spike in prices.
This is an acute challenge for Qantas and Virgin Australia because fuel accounts for about a fifth of the total operating expenses. No wonder, then, that the two companies this week announced they were raising ticket prices and cutting the number of flights.
Still, analysts at UBS estimated that Qantas’s earnings on a per share basis would still be 19% lower in this financial year and 13% lower in the next.
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Both airlines said their suppliers had assured them of fuel supply “well into May”, suggesting another month or so before availability of fuel becomes a much more pressing issue than just sky-high prices.
Ellis Taylor, the Asia editor at Cirium, an aviation analytics company, said the airlines had learned the lessons of Covid and were keen to avoid a repeat of scandals like the notorious “ghost flights” – selling tickets on already cancelled flights.
“This time around where they are cutting flights they are being vocal about that and moving quickly to accommodate passengers. That memory from Covid is close and haunting,” Taylor said.
Even then, the cuts to flights remain relatively minor, he said. “Qantas is exiting only a couple of routes from what we are seeing. It’s more if there are multiple flights on a particular route, they might cut that number down from five a day to, say, three.”
The airlines were able to limit the cuts to flight numbers by offsetting fare increases, but Taylor said the companies would be forced to put more flights on the chopping block if Australians started to travel less.
“At the moment, demand seems to be holding up. We won’t see it announced, but fares will start to slowly ratchet up. I’d expect fares to increase in the order of 20% at the very least compared to last year,” Taylor said.
“It’s hard to measure fares in aggregate, but what consumers will see are fewer discounted tickets. During the peak periods, it might be that the fare differences will be more noticeable.”
Graham Doig, a senior lecturer at the University of New South Wales’s school of aviation, said airlines operated on incredibly thin margins, and over the past couple of months had “done their best” to cushion the blow to customers from the rise in fuel costs.
“I think they are biting the bullet now and have to pass this on to customers, as they don’t have other ways to make up the revenues,” Doig said.
Doig said travellers should brace for air fares that remain higher for longer. “I think the effect will be very long lasting. Oil prices don’t go straight back down – we saw that after Covid. It can take months to years.”
While Doig didn’t blame airlines for cutting back on flights and raising fares, he said the companies during the good times could and should have been reinvesting more of their profits into lifting the efficiency of their fleets, or putting aside cash buffers for the bad times.
He said it would take many years, if not decades, for airlines to meaningfully reduce their reliance on fossil fuels. And while smaller aircraft could be electrified, that wasn’t a solution for larger planes.
Sustainable jet fuels had been scientifically proved to be a viable alternative, “but it’s a cost and a scaling issue”.
“Right now, only a few percent of the global supply of jet fuel could be produced, and it’s not cost-competitive.”
