FINANCE | Rising jet fuel prices may overshadow European airlines' record profits

Major airlines in Europe are poised for another profitable quarter following a record-breaking summer of travel after the pandemic. However, the recent unrest in Israel, the subsequent effect on oil prices, and concerns about a global recession could cast a shadow over the future. Analysts predict robust earnings growth for Q3, fueled by a bustling summer and anticipated strong demand for the remainder of the year, despite high inflation and rising fuel costs. 


Aviation analyst James Halstead noted the strength of transatlantic and intra-European travel, suggesting that limited aircraft availability could keep ticket prices elevated due to a capacity squeeze coinciding with robust demand. Earlier this month, Britain's easyJet expressed its ambition to more than double its profits and expand its fleet, despite potential ticket price increases due to fuel costs. However, airlines' prospects could be affected by increased geopolitical instability following Hamas' attacks in Israel on October 7, leading to flight cancellations, increased oil prices, and concerns about consumer sentiment in Europe. For Q3, Air France-KLM is projected to report an operating income of €1.37 billion ($1.45 billion), a 33% increase from last year, with revenue expected to rise by 7% to €8.7 billion.

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IAG's operating results before exceptional items are forecasted at €1.55 billion, up 28% from last year, while Lufthansa is expected to report adjusted earnings before interest and tax of €1.4 billion, up 24%, with revenue predicted to rise 8% to €10.84 billion. Air France and IAG are set to report on Friday, with Lufthansa following on November 2. Brent crude oil nearly reached $94 a barrel following the Hamas attack but has since dropped to around $88. Spot Northwest European jet fuel prices stood at $957 per metric ton on Wednesday, up 5% from before the attack.


Airlines have already cautioned that rising fuel costs could lead to higher ticket prices or impact future profits. Ryanair CEO Michael O'Leary revealed that the airline paid $65 a barrel for jet fuel last year and is now hedged at $89 a barrel, suggesting that ticket prices could increase by a mid-single-digit percentage before Christmas. Finnair reported a minor earnings impact due to fuel costs on Tuesday. Finnair's CEO Topi Manner stated that fare ceilings have not been reached if jet fuel prices remain high for an extended period. The extent of airlines' hedging could be a crucial factor in determining prices and profitability this winter. It remains uncertain whether higher prices will deter people from traveling. Neil Glynn, managing director of Air Control Tower, noted that if summer transatlantic pricing trends continue into winter as suggested by U.S. commentary, it should not surprise the market if European carriers follow suit. Unless economic and geopolitical conditions deteriorate further, 2024 could potentially be another strong year. "A year ago, there was fear of a consumer downturn that never came," said Alexander Irving, an analyst at Bernstein.

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