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Soaring jet fuel prices 'a huge challenge' for recovering airline industry

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Toronto (Mississauga) Canada; an unidentified light colored twin engine jet airplane approaching with wheels down for landing
According to the S&P Global Platts jet fuel price index, the price of jet fuel jumped to US$141.70 a barrel as of March 4, an increase of 27.5 per cent from the previous week. (Getty Images)

As travel demand reaches levels not seen since the COVID-19 pandemic hit, the airline industry will have to grapple with soaring prices that may raise the cost of tickets and hamper financial recovery efforts.

The sudden spike in jet fuel prices spurred by Russia's invasion of Ukraine is putting additional pressure on the airline industry, just as it is in the midst of a recovery from the pandemic.

According to the S&P Global Platts jet fuel price index, the price of jet fuel jumped to US$141.70 a barrel as of March 4, an increase of 27.5 per cent from the previous week and 96.2 per cent compared to the same time last year. The International Air Transport Association (IATA), a lobby group that represents 290 airlines including Air Canada, WestJet and Air Transat, had previously forecast that the airline industry would lose $11.6 billion in 2022 with the price of jet fuel at $78 a barrel, representing 20 per cent of total costs.

With the cost of jet fuel nearly double that, airlines stand to lose even more this year.

"Absorbing such a massive hit on costs just as the industry is struggling to cut losses as it emerges from the two-year COVID-19 crisis is a huge challenge," IATA chief executive Willie Walsh said in a news release, warning that soaring fuel costs could impact fares as airlines try to recoup losses.

"If the jet fuel price stays that high, then over time, it is reasonable to expect it will be reflected in airline yields."

Some airlines are already looking at raising prices in the wake of higher fuel costs. Transat A.T. (TRZ.TO) chief executive Annick Guérard said on a conference call with analysts last week that the airline is "adapting" its pricing in response to rising costs.

"We are looking at all the programming we have planned for the summer, and we are using (Airbus A321 neo planes), which are very fuel-efficient planes so that is going to be beneficial for us and give us an edge in the upcoming season," she said.

"We are adapting our pricing structure. We are seeing some movement in terms of fuel charges in the Atlantic market as well, so this is reassuring."

The fuel price challenge comes as Canadian airlines ramp up capacity ahead of what is expected to be a busy summer season.

Air Canada (AC.TO) announced last month that it will expand its summer schedule, relaunching 34 international routes, including some that have been suspended since the start of the pandemic in March 2020. Last week, Transat announced it is relaunching a "significant" number of routes to Europe and the United States as COVID-19 restrictions ease. On Monday, WestJet unveiled its summer schedule that includes the full restoration of service across Alberta to pre-pandemic levels. The Calgary-based airline will also offer more transatlantic routes, flying from Calgary to London, Paris, Rome and Dublin, and from Toronto to Barcelona, Dublin, Glasgow, Edinburgh and London.

Cowen & Co. analyst Helane Becker wrote in a note to clients that there is a three to four-month lag before travellers see the impact of rising fuel costs reflected in airfares. She says rising fuel costs may also impact the extent to which capacity is relaunched.

"In general, growth may slow or, as is the current case, capacity that airlines would have brought back if the pandemic continued to recede won't return."

"It is likely the next few months will be financially concerning, even though traffic is strong," Becker said.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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