High Jet Fuel Prices Likely To Spark Structural Shakeout In Airline Industry - Aviation Experts

By Kisho Kumari Sucedaram

KUALA LUMPUR, April 9 (Bernama) -- Rising fuel prices can precipitate a structural shakeout in the airline industry via consolidation, as well as signal the demise of weak and badly run airlines, an aviation analyst warned today.

Inefficient players could be forced out of the market, accelerating consolidation among airlines as they grapple with weakening margins and dwindling demand, Endau Analytics founder Shukor Yusof said.

Since war broke out on Feb 28, a staggering 52,000 flights have been cancelled worldwide, while crude oil prices have skyrocketed to above US$118 per barrel.

The global average jet fuel price rose 7.1 per cent to US$209 per barrel compared to US$195 per barrel last week.

“This is bad news, especially for airlines, as jet fuel could rise to a level that makes flying too costly for even the best-capitalised airlines,” he told Bernama today.

The current environment is exposing the vulnerabilities of different airline business models, particularly low-cost carriers (LCCs), which rely heavily on high passenger volumes and thin margins.

“It looks like this is the start of a significant structural change industry-wide (but) I would argue this is positive, as it will weed out weak and badly run airlines,” he said.

In contrast, he said premium full-service airlines such as Singapore Airlines and Cathay Pacific were better equipped to weather the storm, as they are supported by strong balance sheets, pricing power and efficient management.

Shukor said he saw deeper structural implications for the industry, alluding to the war in West Asia, which led to crude oil prices rising to as high as US$118 per barrel, which in turn led to jet fuel prices increasing significantly.

“Prolonged cost pressures could accelerate consolidation and force inefficient players out of the market,” said Shukor.

While the US and Iran agreed to a two-week ceasefire, Shukor said the recovery for the airline industry could take longer than anticipated, pushing fuel prices to levels that may significantly undermine airline economics.

 

LCCs Under Pressure As Costs Surge

Compared with premium airlines, LCCs, in contrast, are facing a more acute challenge, he said.

“LCCs are in trouble as their business models cannot cope with these levels of jet fuel prices,” he said.

Already, signs of stress are emerging across the sector. Airlines are trimming networks, adjusting flight frequencies, introducing fuel surcharges, raising fares, placing staff on unpaid leave and ramping up fuel hedging activities to offset higher operating costs.

However, he said passing on these costs is not always straightforward. In price-sensitive markets, higher fares risk dampening demand, forcing airlines into a delicate balancing act between profitability and load factors.

Batik Air Cuts Capacity, Signals Wider Strain 

In Malaysia, Batik Air has taken the notable step of reducing approximately 35 per cent of its flight capacity, underscoring the immediate operational impact of the fuel price surge.

The airline has also offered voluntary unpaid leave, with applications open until April 3 for leave beginning April 6.

The move reflects broader trends seen globally, where airlines are scaling back operations in response to weaker demand at higher fare levels and escalating cost pressures.

Shukor described Batik Air’s ability to sustain operations since 2013 as a commendable achievement in a notoriously volatile industry, but cautioned that newer entrants may find it increasingly difficult to survive.

“Startup airlines will not be so lucky unless they are prepared to lose lots and lots of money,” he said.

Singapore-based Sobie Aviation independent analyst and consultant Brendan Sobie views such capacity cuts as a pragmatic and largely short-term response to current conditions.

“It is impossible to predict how long fuel prices will remain elevated as no one knows how long the war will last,” he said, adding that fuel price volatility and geopolitical uncertainty have become recurring challenges for airlines in recent years.

Sobie added that while capacity reductions could be extended if the situation persists, they are not necessarily indicative of a long-term structural shift in flight frequencies.

“For now, capacity cuts like this are temporary and short-term. Obviously, they can be extended if the current situation persists, but everyone hopes things will normalise sooner rather than later,” he said.

He also pointed out that Batik Air’s reliance on late bookings makes it more exposed to sudden cost increases, as it is forced to price remaining seats at higher levels.

Oil prices have since fallen to above US$96 in reaction to the latest ceasefire on Wednesday night between the United States and Iran.

In this regard, International Air Transport Association (IATA) director general Willie Walsh expects crude oil prices to fall, while jet fuel costs are likely to remain slightly elevated due to the impact on refineries.

“If it were to reopen and remain open, it will still take a period of months to get back to where supply needs to be, given the disruption to refining capacity in West Asia,” Walsh said.

 

Uncertainty Persists As Industry Adapts 

Universiti Kuala Lumpur Malaysian Institute of Aviation Technology economist Associate Professor Mohd Harridon Mohamed Suffian said fuel prices are likely to remain elevated due to a ‘risk premium’ embedded in global oil markets amid ongoing geopolitical tensions.

He explained that this premium reflects the probability of prolonged conflict, which continues to influence crude oil prices globally, regardless of where airlines source their fuel.

“Most airlines are susceptible to economic shocks and geopolitical tensions in West Asia, as global supply and demand ultimately determine fuel prices,” he said.

Harridon added that while capacity cuts are largely a short-term response, airlines will need to remain financially disciplined and adopt more sophisticated cost management strategies if high fuel prices persist.

These include route rationalisation, optimisation of maintenance through predictive approaches and careful calibration of fare increases to avoid excessively dampening demand.

On fuel hedging, Sobie said hedging policy remains a key differentiator in the current environment, noting that Malaysia Aviation Group (MAG) is among local carriers that have hedged fuel exposure, potentially cushioning the immediate impact, while the other two, namely Batik Air and AirAsia, have not hedged.

“The reality is that in many markets, many consumers cannot afford the higher fares needed to offset higher fuel costs, and airlines need to cut flights in response to reduced demand,” he said.

Similarly, Harridon said technical crews could take advantage of favourable weather conditions, where tailwinds could aid forward flight, thereby reducing fuel burn and lowering operational costs.

“In the midst of global economic uncertainty, airlines could also reduce flight frequency, where less popular routes are flown less frequently, and several flights could be combined to reduce financial burdens,” he added.

Ultimately, airlines face a prolonged period of uncertainty, with recovery closely tied to geopolitical developments and fuel price movements.

While stronger carriers may weather the storm, the current crisis could accelerate consolidation and redefine the competitive landscape of the aviation industry.

-- BERNAMA