Travellers are facing steep air fare hikes and are being urged by industry experts to book early as bans on Russian oil cause jet fuel prices to surge.
Qantas chief executive, Alan Joyce, has said the average fare would increase by 7% as a result of the increased crude oil prices following Russia’s invasion of Ukraine, but others predict the price rises could be higher.
The Brent crude oil price sits at around US$112 a barrel, up from about US$78 a barrel at the beginning of 2022 and marking an eight-year high, according to the Australian Competition and Consumer Commission.
The surge follows the US and UK banning oil from Russia – the world’s biggest exporter of crude and oil products combined.
For most airlines, fuel makes up 30% to 40% of operating costs.
“You don’t have to be a maths expert to know that fuel costs going up by 20% to 30% will hurt a lot,” Prof Rico Merkert, chair of transport and supply chain management at the University of Sydney’s Business School, told Guardian Australia.
If Europe follows the US’s tough stance on Russian oil, prices may be pushed higher than $200 a barrel, says Merkert. “This would be catastrophic for airlines.”
Ravi Kumar, director of Continental Travels Australia, said in the past, air fare prices have increased between 2% and 5%. The higher the expected increase, the more important it is for consumers to act fast and purchase tickets for travel.
Over the last few days, Kumar has observed increases of up to $100 on ticket prices.
“Generally we recommend consumers buy tickets early when there is an expected increase in prices,” he said. “We don’t know if it will be a minor increase, or grow to a major increase, but we can expect some jump.”
Tom Manwaring, chair of the Australian Federation of Travel Agents, said ticket prices were “coming off a very low base”.
“Air fares were already very, very cheap. So now they’ll just be very cheap.”
He suggested growing confidence in the market among consumers was the main driver of prices at the moment.
Manwaring said Australians planning a trip towards the end of 2022, or early 2023, did not have to hurry to get tickets now. Coming out of Covid, he said most airlines were still operating at severely reduced capacity.
“Most airlines are currently operating at 10% to 25% of their capacity.”
Over the next six to nine months, he expects international carriers will build up capacity, meaning more seats would become available.
“Competition between airlines as that happens will help level prices back out.”
Merkert said the oil price surge was an “unfortunately timed spanner in the works” for the airline industry as it recovers from Covid border closures.
The March 2022 ACCC report found consumers’ intention to travel domestically over summer had dropped “by 10 percentage points” compared to December 2021.
The report attributed a key driver of the decline to consumer concern about contracting Covid – a “different challenge” to the prolonged movement restrictions that characterised the pandemic earlier.
It also noted that volatility in jet fuel prices “will add further pressure to airlines’ costs amid the pandemic”.
An ACCC spokesperson told Guardian Australia: “air fares often reflect consumers’ willingness to pay, or the level of airline competition, more than the underlying costs of providing the service.
“However, air fares may increase to some degree should high jet fuel prices remain,” the spokesperson said. “This may further hinder the industry’s recovery.”
Airlines often enter hedging contracts based on expected future prices to protect from short-term fluctuations in jet fuel prices.
The ACCC report, however, noted that the pandemic “has made this strategy somewhat ineffective”.
“The uncertainty around flying activity has reduced the ability of airlines to accurately forecast fuel consumption volumes,” the report reads.
Joyce said Qantas had hedged 90% of its fuel needs until the end of June, which will “give us time to react to that higher fuel price”.
Merkert said smaller carriers or new airlines such as Bonza Airline that compete on cost were less likely to secure a hedging contract.
“So when fuel goes up by 30% to 40%, costs compromised by fuel price becomes a big issue for them.”
