LIVE MARKETS-Soaring jet fuel threatens European airline capacity
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SOARING JET FUEL THREATENS EUROPEAN AIRLINE CAPACITY
Surging jet fuel prices mean risks are rising that the European airlines sector .T5751P is heading for a material step-down in capacity, according to UBS.
Brent crude LCOc1 has jumped since the start of the war, with prices above $103 per barrel and up about 40% this year. But European jet kerosene prices have surged even more, up more than 130% year-to-date.
"That gap matters," said Jarrod Castle, leisure and transport analyst at UBS.
"European airlines typically hedge a large portion of fuel, often 55% to 80%, over the next 12 months to protect profitability and support forward ticket sales."
But not all airlines hedge the same way. Some hedge against rising Brent crude prices, some hedge against jet fuel and others hedge a proxy for the crack spread, the difference between the price of crude oil and the price of the refined product.
With spreads between crude oil and jet fuel widening, airlines that have hedged against Brent will likely still see fuel bills jump.
"If the Middle East conflict persists, the risk of fuel shortages, or structurally higher prices increases," said Castle.
"In short, fuel is no longer just a cost issue, it's a capacity and connectivity risk, and if shortages emerge, European airline equities would likely come under pressure."
But, Castle doesn't believe the impact will be uniform. Carriers with greater exposure to affected regions, such as the Middle East and eastern Mediterranean face higher risks.
Airlines in the sector include IAG ICAG.L, Lufthansa LHAG.DE, Air France-KLM AIRF.PA, easyJet EZJ.L, Ryanair RYA.I, Finnair FIA1S.HE and Wizz Air WIZZ.L.
(Samuel Indyk)
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