Ryanair and British Airways owner International Consolidated Airlines Group (IAG) are the two carriers best positioned to navigate the ongoing crisis in the Middle East, according to investment bank Panmure Liberum, which cautioned that potential jet fuel supply rationing “could not be ruled out.”
In a note published on Wednesday, Panmure Liberum stated that the London-listed carriers’ high operating margins should enable them to absorb the disruption from escalating jet fuel prices and potential supply constraints.
“We believe the current crisis creates a buying opportunity in the quality airlines,” wrote Panmure’s transport analyst Gerald Khoo. “However, the crisis could yet deteriorate, with jet fuel supply disruption, recession and a spread of the conflict being the main concerns.”
Aviation fuel prices have more than doubled since the outbreak of hostilities, exacerbating challenges for carriers, many of which have been forced to ground and reschedule flights from regional hubs following Iran’s targeting of its neighbors in the Gulf.
Airline shares, typically sensitive to economic sentiment and oil prices, have declined, with valuations of Easyjet, IAG, and Ryanair down between 10 and 30 percent in the past month.
Conflict Sparks Jet Fuel Concerns for Airlines
The conflict in Iran has driven jet fuel prices from approximately $800/tonne to over $1,600/tonne, after Tehran disrupted traffic through the Strait of Hormuz shipping lane.
European airlines have largely resisted taking out new hedges on jet fuel prices, anticipating a resumption of shipping from the Persian Gulf. Ryanair CEO Michael O’Leary has indicated no further fuel price hedging, whereas Easyjet’s Kenton Jarvis also told the Financial Times he expects price increases to be temporary.
However, Khoo warned that without a swift resolution, jet fuel supplies may need to be rationed, potentially forcing airlines to reduce capacity.
“While there are some stockpiles, and the potential to source supplies from elsewhere, supply disruption cannot be ruled out and the risks rise the longer the conflict drags on,” he said.
Vietnam Airlines has already announced plans to cancel 23 flights per week starting in April, citing fuel shortages. According to industry body IATA, approximately 40 percent of Asian airlines’ fuel supplies originate from the Gulf, compared to 25 percent for European airlines.
“It is unclear how jet fuel rationing would be applied,” Khoo wrote, adding: “Airlines would clearly prioritize their most profitable routes, while preferring to trim frequencies on routes with multiple daily flights. However, there is a possibility that governments may attempt to dictate which routes should continue to be served. Governments might also seek to pre-empt larger cuts to flights by enforcing smaller cuts earlier.”
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