Stronger oil prices to support aviation recovery

The rally in oil prices indicates an economic rebound that will propel the global aviation industry's recovery from the Covid-19 pandemic, the head of the International Air Transport Association has said.

The fuel bill represents about 20 per cent of an airline's cost base this year and comprises a higher percentage for low-cost carriers, Willie Walsh, director general of Iata, said recently.

"The positive I take out of the oil price is that it generally reflects strong global economic demand, clearly prices are not driven by speculation at the moment," Mr Walsh said.

"Strong demand for oil, at the $70-$75 range, reflects a generally positive economic environment which will support the airline industry as we recover through this crisis."

The International Monetary Fund said oil prices are expected to rise close to 60 per cent this year above their low base of $41.29 a barrel in 2020, with the Washington-based lender forecasting an average based on futures markets (as of June 2, 2021) of $64.68 in 2021 and $63.02 in 2022. Brent prices were trading at $74.96 a barrel at 9.03pm UAE time.

Airlines' fuel hedging ratios are slightly lower now compared to pre-Covid levels but this will be compensated by a recovery in air travel demand and passenger revenue, Ezgui Gulbas, Iata's senior economist, said during the online conference.

Airlines will examine their hedging strategies more closely after the Covid-19 crisis led to a 90 per cent plunge in travel demand during the early stages of the pandemic.

"That was a unique environment and a new risk that airlines will need to factor in when they look at their hedging policies going forward," Mr Walsh said.

"I don't see the oil price being a factor that will create any distortion in the competition going forward," he added.

In April, Iata's then chief economist Brian Pearce had expressed concern that rising jet fuel prices could make it more challenging for airlines to turn cash-positive during the year, given the low load factors for international travel at the time.

Passenger air travel demand improved slightly in June in both international and domestic travel markets, according to Iata.

Overall demand for air travel in June, measured in revenue passenger kilometres, or RPKs, was down 60.1 per cent compared to June 2019, Iata said in its monthly report. That was a small improvement over the 62.9 per cent decline recorded in May 2021.

Demand for international travel in June was 80.9 per cent below pre-crisis levels in June 2019, an improvement from the 85.4 per cent decline recorded in May 2021. All regions except Asia-Pacific contributed to the slightly higher demand.