Rising Jet Fuel Costs Put Smaller Airlines at Risk Amid airBaltic Crisis
Impact of Jet Fuel Price Surge and airBaltic Bankruptcy on the Airline Industry
By Joanna Plucinska and Gianluca Lo Nostro
LONDON, Sept 15 (Reuters) - After Latvian airline airBaltic filed Chapter 11 proceedings on Monday, the aviation sector is bracing for a tough winter as the Iran war continues to push up jet fuel costs.
The U.S. war with Iran has sparked the worst airline crisis in terms of costs since the COVID-19 pandemic, and airBaltic became the first European carrier during the conflict to file for bankruptcy, while U.S. peer Spirit collapsed in May after seeking protection before the war.
Airlines operate with relatively thin margins compared to other sectors, leaving them more exposed to geopolitical turmoil, particularly in winter when they burn through cash they earned in the busy summer season as bookings and travel slow.
Sacrificing Returns: Struggles of Smaller and Budget Airlines
SACRIFICING RETURNS
Smaller carriers are particularly vulnerable to further earnings pressure, with the price of jet fuel set to stay high as long as the Strait of Hormuz remains blocked.
"Smaller, niche players are (most) at risk," aviation analyst John Strickland said.
Bigger budget airlines that depend on offering cheap fares are also being hit hard by a doubling of fuel prices since the war began in late February, although they also have individual strengths.
Wizz Air: Navigating Losses and Future Stability
Wizz Air's operating losses deepened in the first quarter, it reported last month, saying it expects revenue per seat to keep falling in the current quarter after it cut fares to attract passengers. They reached a record 8.7 million in August.
"Supported by strong liquidity, a disciplined hedging programme and one of Europe’s youngest and most efficient fleets, Wizz Air continues to invest, grow and serve more customers than ever," the airline said in a statement to Reuters on Monday.
James Halstead, managing partner at Aviation Strategy, said that Wizz Air is in a better position than state-owned airlines thanks to its stock market listing.
"They are growing strongly, which means they are sacrificing returns now for future stability. They have a very good brand and operating model and they do have support," he said.
AirAsia and Air Transat: Seeking Stability Amid Losses
Elsewhere, Southeast Asian budget carrier AirAsia is seeking to raise fresh capital after consistent losses and an aggressive restructuring, while Canada's Air Transat has struggled with spiralling jet fuel costs.
AirAsia said it saw no problems with its business sustainability and was seeing strong underlying demand.
"AirAsia remains focused on maintaining business continuity and stable operations across all its markets and we continue to see strong underlying demand across our network," it said in a statement. "We are also working closely with our stakeholders to manage our financial and operational requirements."
Air Transat is also taking measures to stabilise operations, "including actively reducing costs and improving productivity," it told Reuters.
More Routes for Bigger Players: Market Shifts and Consolidation
MORE ROUTES FOR BIGGER PLAYERS
A tough market could see some smaller national airlines cede routes to larger, deeper-pocketed rivals, executives and investors said. They could also face challenges from budget airlines such as Ryanair and Wizz Air that have taken over smaller secondary airports and worked to take plum slots and routes across central Europe in a push for growth — offering consumers better price options, analysts say.
Route Takeovers and National Airline Strategies
In August, Wizz Air CEO Jozsef Varadi told reporters that the carrier was keen to take over routes from Romania's state-backed carrier TAROM.
"For Romania’s national airline, bankruptcy is not a scenario on the table," TAROM said in a statement to Reuters, adding it was renewing its fleet and rebuilding its strategy to better serve its customer base.
Consolidation Trends in the European Airline Market
The tougher market conditions could accelerate a long-standing move in Europe towards consolidation, pushing some smaller carriers into bigger groups like British Airways-owner IAG, Lufthansa and Air France-KLM.
Norse Atlantic, which is still reporting quarterly losses, in July started a process for a sale or merger. It did not immediately respond to a Reuters request for comment. Poland's state-owned carrier LOT has been a suspected consolidation target for years.
"LOT today is in a fundamentally different position from that of the past. Despite the energy crisis, we are carrying out the largest fleet renewal and expansion programme in our history," LOT spokesperson Krzysztof Moczulski told Reuters in an email.
airBaltic's Prospects and Strategic Investors
AirBaltic has said it is looking for another strategic investor, but none has publicly expressed interest to date.
Lufthansa owns a 10% stake in airBaltic but has said it doesn't plan to increase its stake. It declined to comment on what its next steps could be given airBaltic's Chapter 11 proceedings.
Still, analysts said Chapter 11 proceedings could give airBaltic the chance to recover and survive, unlike Spirit.
"This gives them a protective framework to put their house in order," said Strickland, pointing to Scandinavian rival SAS as a successful example of a turnaround.
(Reporting by Joanna Plucinska and Gianluca Lo Nostro. Editing by Adam Jourdan, Susan Fenton and Mark Potter)
