High Fuel Prices Pose Risk of Airline Profit Downgrade
UBS says the narrative for the aviation industry has shifted: capacity constraints faced post-pandemic have enhanced pricing power for Asia-Pacific airlines. However, short-term airline profits are inevitably under pressure.
The conflict in the Middle East has caused a significant rise in fuel prices and may lead to fuel supply tightness; if fuel prices remain high for an extended period, airline profits could face notable downgrade risk.
How Fuel Cost Pressure Passes Through to Operations and Fares
UBS Asia transport sector analyst Yang Yupeng said fuel cost is one of the largest cost items for airlines, averaging about 30% of total operating expenses. He noted that to relieve cost pressure, airlines have raised fares, which may affect load factors depending on price elasticity of demand.
To hedge against rising oil prices, airlines cut flights (especially on less profitable routes) and increase fuel surcharges; however, it remains difficult to fully offset the impact of higher oil prices.
Demand-Side Changes and Profit Recovery Scenarios
On the other hand, affected by the Middle East conflict, some passenger traffic previously carried by Middle Eastern airlines has shifted to Asian carriers, boosting demand on European routes.
In a non-recession scenario, given continued tight supply of aircraft and flights, once fuel cost pressure eases, UBS expects airline profitability to recover quickly.
Relatively speaking, Yang Yupeng said airlines with lower demand elasticity (e.g., higher business travel share), better fleet fuel efficiency, and more effective fuel hedging strategies are expected to have stronger resilience and relative advantages. He noted that due to insufficient fleet supply, he is positive on the medium- to long-term earnings outlook for the aviation industry.
(Reporter Lin Defen)
