The price of oil surged yesterday to a six-month high on world markets, following President Donald Trump's announcement about eliminating exceptions in the sanctions against buying oil from Iran. If the price remains at its current level of $65 a barrel, flight prices are liable to rise before the summer.
"I estimate that the president's announcement will increase fuel prices by a further 15% in the short term," says Israir CEO Uri Sirkis. "The result will be an increase in ticket prices in the medium term, because in the short term, most airlines have contracts and a paper inventory that will not be affected by the price rise."
The aviation sector is very sensitive to oil prices, because fuel accounts for a significant percentage of ticket prices. According to the International Air Transport Association (IATA), 28% of the current average ticket price of $380 is based on the price of oil. "We are likely to see a 20-25% rise in prices of tickets and vacation packages for the summer and the Jewish High Holy Days," Sirkis says. "No airline wants to be the first to raise prices, because of competition and the fear of losing customers."
"The rise in oil prices is bad news for passengers and very bad news for the airlines," says ISSTA VP marketing Ronen Carasso. "Although revising prices is likely to take several weeks, companies that do not manage to roll the higher cost of fuel on to the consumer could suffer heavy losses." Carasso expects a more moderate price rise. "Since fuel accounts for a third of the ticket cost, a 20% rise in the price of fuel will cause a 7% increase in flight prices," he predicts.
"Oil prices have a substantial effect on the airlines' financial performance," says IATA country manager Israel Kobi Zussman. He says that since the airlines are aware of the challenge, they hedge the price in order to reduce their damage from volatility.
"There is no fixed hedging formula," Zussman says. "Fuel poured into a plane flying tomorrow morning can theoretically be fuel purchased six months or a year ago in a hedge deal. At the same time, the change in the price of fuel creates enormous pressure on airlines, given the fact that the airlines' average profit per passenger today is $7.50. A dramatic fluctuation in oil prices will eventually increase the prices of flights."
Published by Globes, Israel business news - en.globes.co.il - on April 23, 2019
© Copyright of Globes Publisher Itonut (1983) Ltd. 2019