Airlines had a 2021 of high demand and even growth in the case of Mexico, but they also faced some of the highest operating costs in recent years, specifically in the jet fuel category.
Over the course of last year, the cost of jet fuel for companies grew at an average monthly rate of 40.2% compared to 2020, when prices had an average monthly drop of almost 30%, according to data from the National Institute of Statistics and Geography (INEGI).
This trend corresponds, in the case of 2020, to a general drop in fuel prices worldwide due to the cessation of economic activities, which gained momentum again last year, causing strong demand, according to experts.
In this regard, Jonathan Félix, an analyst at Verum Calificadora de Valores, explains that airlines cover themselves from price volatility through financial instruments, such as derivatives, with which they fix part of a cost in a given time.
“This coverage, or hedge , does not cover 100%, but only a proportion”, explains the specialist. “So when there is volatility to the upside, and if it goes up 20%, they absorb 10% because the other half was covered. If there are price volatilities, they don’t feel that impact directly.”
However, Félix considers that, given the risk that financial institutions will assume in an environment of rising fuel prices, the cost of coverage could increase for airlines.
This coincides with expectations of the industry itself. The International Air Transport Association (IATA) reported that, in January, the price of fuel registered its highest level since the end of 2018. And according to its fuel price index, in the last 12 months has had a rise of 74% worldwide.
IATA explains that these costs have been derived from the impact that the omicron variant of Covid-19 has had on travel demand. For this reason, it estimates that, from the levels close to 80 dollars per barrel that were seen at the end of 2021, this year aviation fuel will reach prices of up to 100 dollars per barrel.
“Elevated fuel prices are adding pressure to airlines’ operating costs, at a time when revenues are being hit by omicron-related flight cancellations,” it said in a report. “This could delay the financial recovery of the airlines.”
To mitigate the potential rise in operating costs for fuel and take advantage of demand trends, Fernando Gómez Suárez, an analyst in the airline sector, sees a greater inclusion and substitution of aircraft within Mexican airlines as likely.
“What they can do with their internal fleet is readjust it. The convenient thing would be to reconfigure its fleet with new acquisitions and changes (…) Most of the aircraft are under financial lease, which allows them to change units from time to time, with which they can adapt to market growth expectations”, refers.
For the consumer, this might not be good news. Although the price of fuel is transferred in different measures to the consumer –depending on the route and the airports from which it is flown–, specialists see that, if the rise in energy prices continues, it could begin to translate into more expensive flights.
“Airlines can adjust that price. We don’t have a percentage or value of what could happen, but we don’t think it will be fully transferred either,” says Félix. “If it is an increase that is seen as permanent, prices have to be adjusted because it is the main item in the cost structure of airlines, and if they begin to adjust a lot, they should go up.”
