European Airlines’ recovery dampened by Russia-Ukraine conflict
The European airline sector is affected by record-high fuel prices as a result of the Russia-Ukraine conflict and subsequent restrictions, sanctions and counter-measures, Fitch Ratings says.
Increased jet fuel costs, particularly for carriers with lower hedging ratios, could undermine profitability recovery, despite European carriers having higher hedging positions relative to other regions. This is exacerbated by bans to fly in and over the countries involved in the conflict, leading to traffic losses and lengthened long-haul routes.
Hydrocarbon prices have been rising since the start of the war, fuelled by fears over future supply interruptions and self-restrictions on purchases of Russian oil imposed by commercial buyers, increasing demand for oil from other regions.
Fuel is the largest expense item for airlines, having represented about a quarter of all costs before the conflict with a growing share of costs as fuel prices rise.
European airlines’ hedging ratios are higher than other regions, at generally about two-thirds of expected consumption for the next 12 months. However, their approach to hedging has been diverging since the start of the pandemic.
For example, Wizz Air switched to a no-hedging policy from September 2020 but has since has returned to hedging following the recent price jump, locking in higher prices. Ryanair and BA kept their high hedging ratios, locking in fuel prices at much lower levels and hedged for longer periods. Wizz Air’s cost competitiveness is weakened and its profitability will come under pressure if the price stays high for longer than few months.
Most European countries have closed their aerospace for Russian airlines in response to the country’s invasion in Ukraine, and the Russian government has reciprocated.
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Flights over Ukraine are suspended due to the war. Russian airlines are more affected by these measures, while flights to Russia and Ukraine constituted a small share of revenue for most European airlines. Russian airlines are also unable to purchase aircraft and parts from most global aerospace companies and their existing leasing agreements must be terminated.
Turkey is among the few countries that allow Russian airlines in their airspace. Turkey’s carriers (particularly Turkish Airlines, which has increased relevant capacity during the conflict) could benefit in the short term from the country’s position as the hub linking Russia with other destinations.
In the absence of flying over Russia, carriers with more southerly routes to Asia, such as Turkish Airlines and Etihad, could benefit in the short term, although general demand from Asia is yet to be meaningful. Flights over Russia and Ukraine were the shortest routes for many long-haul flights for European airlines, which now have to lengthen, increasing costs.
The only rating in our European airline portfolio downgraded as a result of the war is Aeroflot (to ‘CC’) due to sanctions on the provision of aircraft and spares that will severely disrupt its business due to its all-leased fleet of mostly Boeing and Airbus aircraft.
However, we continue to monitor how carriers respond to the new challenges, including their ability to mitigate fuel cost increases, accommodate pent-up demand for travel during the upcoming summer season and their pricing policies. Significant liquidity buffers accumulated by most European airlines help mitigate immediate pressures on credit profiles.
Air traffic is still recovering from the pandemic, supported by the return of leisure travel. We expect a full recovery to 2019 traffic levels by 2024. The latest geopolitical developments, if their impact is lasting, are another setback that may slow the recovery.
The conflict could have a broader impact on commodity prices, inflation and the cost of living, which may affect carriers’ ability to offset costs via higher ticket prices.
