The boss of British Airways‘s parent company has warned all airlines will have to increase fares due to soaring jet fuel costs as the Middle East conflict continues.
International Airlines Group warned its profits will be hit as it expects to spend about €2billion (£1.7billion) more than planned on fuel this year because of the oil crisis.
IAG chief executive Luis Gallego said it is ‘managing the uncertainty’ caused by the fuel price increase by ‘taking the necessary action on yields, costs and capacity’.
But he admitted all airlines ‘need to increase fares in order to mitigate the impact’ of the increase in the price of fuel, which represents about a quarter of their costs.
The US-Israeli war against Iran has seen the Strait of Hormuz effectively closed and sent aviation fuel prices soaring since late February amid a global energy shock.
Many airlines have already announced flight cancellations, but Mr Gallego added: ‘Whilst the impact of the higher fuel price will inevitably lead to lower profit this year than we originally anticipated, we are confident in our business model and strategy.’
Shares in IAG – which also owns Iberia, Aer Lingus and Vueling – fell by 4 per cent in early trading this morning after the company said it expects its fuel cost to reach €9billion (£8billion) this year, impacting its full-year profit and free cash flow.
Iran continues to have a stranglehold on tankers passing through the strait, leading to ongoing concerns over jet fuel shortages heading towards the peak summer season.
A British Airways plane on the ground at London Heathrow Airport’s Terminal Five last Sunday
International Airlines Group chief executive Luis Gallego said airlines ‘need to increase fares’
The average global jet fuel price increased for the first time in a month last week to $181 (£134) per barrel, according to International Air Transport Association data.
This 1 per cent week-on-week rise followed three consecutive weeks of decline after a peak of $209 (£155) at the start of April – up from $99 (£73) at the end of February.
Global figures released by aviation analytics company Cirium show 13,005 flights planned for May were axed between April 10 and April 21, equivalent to 1.5 per cent.
And the situation could yet worsen – with travel expert Paul Charles from consultancy The PC Agency saying this week that 10 per cent of flights could be at risk in June if supplies continue to be squeezed, equating to about 85,000.
On jet fuel supply, Mr Gallego said IAG does not believe there will be ‘any interruption for the summer’.
He acknowledged there is less jet fuel coming from the Middle East, but there are ‘other places with record supply’ such as the US.
Mr Gallego said IAG has been ‘planning for situations like this for many years’, and has invested in its own jet fuel supply at its ‘main hubs’. He added that ‘markets like Asia that were weaker’ in terms of fuel supplies are ‘building up reserves’.
IAG said it has seen ‘strong demand across most of our markets’ but ‘softer demand’ in the eastern Mediterranean.
The company recorded a pre-tax profit of €422million (£365million) during the three-months to the end of March. That was a 76.6 per cent increase from €239million (£207million) a year earlier.
Mr Gallego attributed the firm’s ‘strong first quarter’ to ‘continued strong demand for our networks and airline brands’.
He went on: ‘IAG is uniquely positioned to navigate the current headwinds created by the Middle East conflict thanks to our leading positions across diverse markets, strong brands, structurally high margins and strong balance sheet, as well as a strong track record of execution.’
IAG said about 3 per cent of its capacity was ‘exposed to the Gulf region’ at the start of the war on February 28, mostly with British Airways flights.
A large part of this has been redeployed, including boosting capacity at destinations where there are now fewer flights by Middle East carriers such as Bangkok, Singapore and the Maldives.
British Airways has also announced additional flights this summer on routes with higher demand for direct flights, such as India and Nairobi.
Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said: ‘IAG has hedges in place for around 70 per cent of its fuel needs this year. That means, despite a near doubling in fuel prices, the group’s total fuel costs this year are only expected to rise from €7.1billion to around €9billion.
‘With its diverse portfolio of airlines operating with structurally higher margins than most of the competition, IAG expects to offset around 60 per cent of the increased fuel costs this year through capacity reallocation, pricing actions and even tighter cost controls.
‘Only around 3 per cent of the group’s capacity was exposed to the Gulf region prior to the conflict, and a large part of this has already been redeployed to routes with reduced supply, such as Bangkok and Singapore, due to fewer flights by Middle Eastern airlines.’
Yesterday, Middle Eastern carrier Emirates said it remained ‘the world’s most profitable airline’ after recording a pre-tax profit of 24.4billion dirhams (£4.88billion) in the year to the end of March, up 7 per cent from the previous 12 months.
Air France-KLM meanwhile has cut its 2026 outlook, saying higher fuel prices would expand its fuel bill by more than a third.
It comes as the European Union Aviation Safety Agency cleared the way today for the possible use of US jet fuel within the EU, which is seeking ways to confront the threat of shortages due to the war.
Jet A, a US-produced type of aviation fuel, is not currently used in Europe which along with much of the rest of the world operates on a fuel called Jet A-1.
In new recommendations, EASA said: ‘A potential introduction of Jet A in Europe or in other parts of the world would not generate safety concerns provided that its introduction is properly managed.’
Jet A has a higher freezing point than Jet A-1 – which makes it less resistant to very low temperatures during long-haul flights.
But the agency conditioned its use, warning that its introduction into a system historically operating on Jet A-1 could introduce ‘operational’ risks when both fuels are used.
An EU Commission spokesperson also said there was no concrete evidence of jet fuel shortages as it stands.
The International Energy Agency warned on April 16 that Europe had six weeks of jet fuel left before shortages begin – meaning a date of May 28.
But Transport Secretary Heidi Alexander has insisted summer holiday plans will not face major disruption because of jet fuel supply issues – adding that more fuel has been imported from the US, while refineries have upped their production.
The Government has also introduced a temporary rule change allowing airlines to group passengers from different flights together on to fewer planes to save fuel.