High Fuel Prices May Bring Risk of Airline Profit Downgrades
UBS says the airline industry narrative has shifted: post-pandemic capacity constraints have boosted pricing power for Asia-Pacific airlines. But in the short term, they believe airline profits will inevitably face pressure.
The conflict in the Middle East has significantly raised fuel prices and may lead to tighter fuel supply; if fuel prices stay elevated for a long time, airline profits could face significant downgrade risk.
How Fuel Cost Pressure Translates to Operations and Fares
UBS Asia Transport Analyst Yu-Peng Yang said fuel cost is one of the largest cost items for airlines, averaging about 30% of total operating expenses. He noted that to ease cost pressures, airlines have raised fares, but this may affect load factors depending on price elasticity of demand.
To hedge against rising oil prices, airlines also cut flights (especially on less profitable routes) and increase fuel surcharges; however, it is still difficult to fully offset the impact of higher oil prices.
Demand-Side Changes and Profit Recovery Scenarios
On the other hand, due to the Middle East conflict, some passenger traffic originally carried by Middle Eastern airlines has shifted to Asian carriers, significantly improving demand on European routes.
In a scenario without an economic recession, given the continued tight supply of aircraft and flights, UBS expects airline profitability to recover quickly once fuel cost pressures ease.
Relatively speaking, Yang said airlines with lower demand elasticity (e.g., higher proportion of business travel), higher fleet fuel efficiency, and more effective fuel hedging strategies are expected to have better resilience and comparative advantages. He noted that due to insufficient fleet supply, the medium- to long-term profit outlook for the aviation industry is positive.
(Reporter Lin Defen)
