“Global supplies of crude and fuel are (not uniformly but) currently greatly reduced by the risks for oil tankers in the Gulf and through the Strait of Hormuz and by the availability of insurance.”
This sets the scene not only for higher fuel prices in the longer term but also for longer term disruption.
Longer term disruption to airlines and the aviation industry but a boost for SAF
With refineries in the Middle East damaged and with stocks and supplies to crude to refineries globally insufficient, their ability to continue refining and supplying fuel will be reduced. If airports and airlines’ stocks of fuel are depleted for any length of time, airlines will cease to be able to fuel their aircraft and will have to reduce their operations. This may have far-reaching consequences.
Airlines will want to be certain of being able to refuel at their destination (for the return flight) before leaving their home base but passengers/crew of airlines whose supply of fuel may suddenly be constrained (at their home base or at their destination) might find themselves stranded far from home with limited options for flying back.
Further flight cancellations can be expected, even by airlines operating from home bases where there is a reliable supply of fuel, impacting the broader aviation industry (airports, airline caterers, etc.).
The reduced refinement of fuel by Middle Eastern refineries might first affect airlines that operate in and to/from the Middle East but it will only be a matter of time before these supply constraints are felt further afield in other regions that are dependent on their supplies from the Middle East (notably Europe, Asia and Australia). 25-30% of Europe’s fuel is supplied from the Middle East. India, Singapore, China, South Korea and Japan are reliant on imports of crude but may have good capacity to refine fuel. Australia, though, has limited refinery capacity so is heavily dependent on imports of fuel.
Prices for available fuel might be expected to increase greatly.
In today’s global economy, this would likely impact poorer countries/airlines more than wealthier ones who may more readily afford premium prices for fuel and pass the cost on to their wealthier passengers and cargo customers by way of fuel surcharge.
We can expect there to be a few disputes arising out of crude and fuel shipping and supply contracts. We have already had enquiries relating to a number of deviation, blockade, force majeure, insurance and other claims. Further insight in relation to the potential impact on aircraft insurances can be found in our article here.
Ticket prices for airlines that have reliable fuel supplies can be expected to rise, both because of the higher price of fuel (and fuel surcharges) and because of reduced supply in available seats.
If an airline can fly both outbound and return legs on one tank of fuel, an airline with a reliable source of fuel at its home base may choose to do so. It may, though, need to fly a reduced number of passengers on the outbound leg to respect the aircraft’s maximum take-off and landing weights.
This may be beneficial for the on-going development of the market for SAF (sustainable aviation fuel derived from sources other than crude) in narrowing the price difference between SAF and conventional fuel. Indications to date, though, are that prices for SAF have risen by even more than prices for fuel, perhaps due to market pricing mechanisms for SAF being linked to prices for fuel but undoubtedly because demand for SAF has immediately risen due to the constrained supply of conventional fuel. Alongside other renewable energies, expect there to be a renewed drive for the development of production of SAF and its financing, with policymakers keen to ensure fuel supply security.
Where routes and cost-benefit analyses permit, airlines may tend to fly their more fuel-efficient aircraft and to keep their less fuel-efficient aircraft on the ground.