EconomyFinancialGive me more jet fuel: more than 40% of...

Give me more jet fuel: more than 40% of airline spending goes to fuel

During the first quarter of the year, Mexican airlines allocated more than 40% of their operating expenses to the fuel category, an index higher than the 30% threshold that they registered in the same period of 2021, mainly due to the increase in the prices of the jet fuel coupled with growth in passenger traffic.

According to the financial reports for the first quarter of the year, for Aeroméxico, Viva Aerobus and Volaris, the cost of fuel for the three airlines increased by an average of 142.5% over the course of the last year, with a rise in the cost per gallon of jet fuel of more than 60% in the period.

Fuel prices have risen steadily since the Russian invasion of Ukraine last February, and they seem to be showing no signs of letting up. Only in the week prior to May 27, worldwide the cost of air fuel grew 7.9% according to the Jet Fuel Price Monitor, an indicator prepared by the International Air Transport Association (IATA) and S&P.

Jonathan Félix, an analyst at Verum Calificadora de Valores, believes that the effect of this trend has consequences for both airlines and passengers, since they are the ones who absorb part of this increase through more expensive flights.

“This impacts the profitability of companies. The good thing for the airlines is that this increase can be reflected in the cost of the ticket, they mitigate it by transferring it to consumers, but if it is a lot they cannot transfer the total”, he explains.

For airlines, the recovery in passenger flow – which has grown significantly for companies such as Viva Aerobus and Volaris compared to before the pandemic – is part of the formula to counteract the rise in jet fuel prices.

“Strong demand has allowed us to gradually increase fares to compensate for rising fuel prices,” Enrique Beltranena, CEO of Volaris, said in the airline’s first-quarter financial report.

This increase also affected the cost per available seat kilometer (or CASK, for its acronym in English) of the three airlines, which reflects the cost of operation for each seat offered, and which increased by an average of 10% in the first quarter of the year.

“Beyond the fact that passenger traffic has increased, the cost of each seat has had a double-digit increase for the first quarter, which generates pressure for this year,” says Brian Rodríguez, an analyst at Monex Grupo Financiero. “This could be mitigated by the airlines with a greater capacity for passenger traffic and a transfer to rates for the final consumer. The first quarter had quite significant pressure on operating margins”.

However, beyond the cost of jet fuel, airlines have managed to restructure other costs.

This was reflected in CASK excluding fuel, which decreased by an average of 8% for the three airlines combined. While Aeroméxico reduced this cost by 5%, Volaris reduced it by 7.7%, while for Viva Aerobus it was 11.1% lower than at the beginning of 2021.

In the case of Viva Aerobus, for example, the decrease in the cost per available seat-mile excluding fuel reflects “greater use and density of seats, and strict controls on operating and administrative costs,” according to the airline in its financial statements.

Another solution implemented by airlines to reduce this cost has been to incorporate new aircraft, which in addition to satisfying passenger demand, make fuel use more efficient.

“At Volaris we have seen it reflected in a significant way for a few years. Adding airplanes with neo technology, which have a fuel saving efficiency of 13% to 18%, according to airline data, makes their flights profitable with lower fuel costs,” explains Rodríguez.

Going forward, the outlook is that pressure on fuel costs will continue, especially as geopolitical conflicts prevail.

“The pressure on costs is going to continue for at least another two quarters, especially due to the conflict in Ukraine,” concludes Félix.

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