There has been a tremendous surge in jet fuel prices globally after the Covid 19 pandemic, with prices having increased by more than 70 per cent to a massive 14-year high in the first six months of 2022, according to the International Air Transport Association. This is attributed partly to the impact of the Russia-Ukraine war on crude oil prices, which has disturbed the equilibrium of the pricing of aviation turbine fuel (ATF). Despite the easing of Covid-19 restrictions, airlines and passengers face a steep rise in cost due to shortages in crude oil supply. The global benchmark Brent crude price has risen around 21 per cent this year as compared to the previous year. Although Europe has been the hardest hit, Asia and America have also been adversely affected. This has led to acute economic pressure on airlines with the average global jet fuel price at $141 per barrel this year, forcing airlines to increase airfares. A look at the reasons, impact, and measures taken by the Southeast Asian (SEA) countries in response to this situation…
Reasons for surge
The Covid-19 pandemic forced airlines to realign their plans following the sharp drop in traffic movement as a result of the restrictions imposed to control the spread of the Covid-19 pandemic. The reduced traffic resulted in reducing the demand for ATF and led to production cutbacks over the prepandemic levels. While the industry was still coping up with this issue, the outbreak of the Russian-Ukraine war resulted in oil market volatility and pushed oil prices higher in the international market. The pandemic-induced drop in traffic along with the increase in airfares has led to making the recovery prospects of the industry bleak. It is also expected
that the strong demand for diesel will continue to depress the output of ATF. Apart from these, some local factors have also aggravated the condition in specific SEA countries. For instance, government authorities in Myanmar have imposed sanctions on the supply of ATF due to the political unrest in the country. This has raised fuel costs since it depends on the import of ATF, with the main supplier of the fuel in the country being National Energy Puma Aviation Services, a joint venture between Singapore-based Puma Energy and stateowned Myanmar Petrochemical Enterprise.
Impact and challenges
The cost of jet fuel typically accounts for around a quarter of an airline’s total operational costs, and, therefore, volatility in jet fuel prices affects the viability of airlines. For instance, in the case of Vietnamese airlines, fuel costs account for 40 to 50 per cent of operation costs and, despite an increase in revenue with improved travel conditions, they are in a dismal position. Vietnamese carriers are suffering a loss of nearly VND 100 billion per month, according to the Civil Aviation Authority of Vietnam. Moreover, the losses incurred by airlines have also caused a reduction in the seat capacity in SEA, where the number of seats fell by 18 per cent in the case of domestic flights and 49.5 per cent in the case of international flights in October 2022 as compared to October 2019 as per OAG, a global travel data provider. The impact of high ATF prices also varies with other factors such as geopolitical relations, sanctions imposed due to the war, and/or consequent airspace closures. High ATF prices have hit tourism in SEA countries quite hard both because of reduced consumer confidence and the increased cost of air travel.
Varying coping mechanisms are being attempted by governments and aviation players to mitigate the impact of high ATF prices. In Indonesia, the government supported the tourism sector that had been hit by expensive air tickets by introducing subsidies on fuel prices, although subsidised prices too increased by about 30 per cent in March 2022 in comparison to the previous year. Owing to this, the share of budgetary allocations for subsidies is expected to increase and this could widen the fiscal deficit. Besides, the Indonesian government pushed airlines to increase their flight frequency to absorb the price shock based on its belief that increased flight frequency would help improve the airline network and stabilise passenger traffic, and hence, the viability of its airlines. Garuda Indonesia, the national carrier of Indonesia, along with its low-cost subsidiary Citilink, announced in August 2022 plans to add 65 aircraft to the fleet by the end of 2022. The price rise has also prompted jet fuel companies to produce sustainable aviation fuel (SAF) as a long-term pricing solution.
Although SAF, at present, costs three times as much as conventional jet fuel, airlines have started increasing the consumption of SAF. For instance, the Philippines’ Cebu Pacific Airline signed a memorandum of understanding with Shell Petroleum Corporation on September 27, 2022, for the supply of 25,000 tonnes of SAF per year for five years from 2026 onwards. Globally, 100 million litres of available SAF was used by airlines in 2021; orders have been placed for more than 14 billion litres in the coming years, according to the International Air Transport Association. As per Neste, the world’s largest SAF producer, the annual production capacity for SAF is expected to increase to 1.5 million tonnes by the end of 2023; this is expected to increase further to meet future demand. Singapore’s refineries will produce 50 per cent of this expected amount.
With the support of a better policy framework by governments, investments in SAF production can be further accelerated if governments adopt a better policy framework. Another measure with the potential to mitigate the effects of higher ATF prices is a reduction in the environmental tax on fuels to control domestic ticket prices as suggested by the Civil Aviation Authority to the Ministry of Transport in Vietnam. The authority, while proposing to raise the price cap for domestic travel, also suggested introducing a fuel surcharge for local routes. It is the additional fee by airlines that is separate from the base fare and is paid by the passenger for his or her seat. It essentially helps the airlines recover high costs. Likewise, many airlines have been prompted to introduce fuel surcharges on tickets.For instance, Malaysia’s AirAsia reintroduced the surcharge that had been withdrawn in 2015 in March 2022 although countries like the Philippines have banned it altogether.
It is expected that jet fuel prices are not likely to return to the levels of 2019 until at least early 2023 since high travel demand in the form of revenge travel would take time to balance out.The volatility in jet fuel prices can be addressed through robust policy measures by different governments. At a regional level, the industry’s recovery also relies on multilateral initiatives such as the Comprehensive Air Transport Agreement signed by member countries of the Association of Southeast Asian Nations and the European Union on October 17, 2022. It will enable the restoration of affected air connectivity between the regions while improving air operations. Besides, measures to improve the quality of aircraft and more efficient fuel manufacturing could help reduce costs. There is also a silver lining to the situation with the airlines of some countries like Singapore, that have returned to making profits. Singapore Airlines and Scoot are among them and have announced their highest-ever half-year operating profit for the first half of financial year 2022 (April to September).