The term “air industry” refers to companies that provide air transportation services to paying clients or coworkers. Both passengers and freight may use these air transportation services, which are most frequently offered by jet aircraft. However, some airlines may also employ helicopters. And just like every other business, the air industry too is liable for expenses and costs. Costs of labor and petroleum are the two main expenses that have an impact on airline companies. An estimated 35% of all airline operational costs are labor-related, while fuel costs are estimated to use 10% to 12% of operating costs (Sibdari et al., 2018). Both of these factors hold greater value for air industry operations.
For proper and smooth airline operations, companies must meet all costs to satisfaction. Servicing, parts and labor, managing goods, surcharges, taxation, advertising, incentives, travel agent fees, and passenger charges are among the less expensive costs for airlines. These expenses comprise over 55% of all operational expenses (Wang & Gao, 2020). While fuel prices might fluctuate greatly depending on oil price, labor expenditures are set mainly in the short term (Sibdari et al., 2018). Analysts focus more on fuel prices in the short run due to this. Two-thirds of the costs associated with an airplane are constant (Wang & Gao, 2020). Therefore, fluctuations in fuel prices might cause a flight to turn a profit or a loss depending on the number of passengers.
Programs to hedge fuel expenses are widely used in air businesses. Airline companies purchase futures contracts to settle costs for a predetermined period, making it an ongoing fee (Atems, 2021). This conduct is rewarded as fuel prices increase. When fuel prices fall, consumers suffer because the market rate would be less than what they pay now. Even though the operation of transporting people around the globe and across the nation has become an essential component of human life, the air industry customarily has remained fiercely competitive.
The pricing of aviation fuel, which has skyrocketed over the previous year, is one of the primary causes of the surge in flying rates. The price of aviation fuel has risen twice since 2019 due to the growing cost of crude oil. According to Wang & Gao (2020), analysts claim that a 10% spike in gasoline prices results in an approximate 3% uptick in airline overall operating costs. That might encourage airlines to raise ticket prices, add new levies, or impose other fees.
Given the importance of the aviation industry to the economy, businesses and policymakers must be mindful of the developments and potential long-term effects brought on by rising fuel costs. Oil and gas price spikes are among some of the most challenging moments for airlines, as we have seen in the current state (Atems, 2021). Airlines can anticipate gradually growing costs by raising ticket prices or lowering the number of flights, but abrupt increases in expenses often result in losses for many airlines (Atems, 2021). Analysts discovered that the present gasoline price increase may have caused a decrease in short-stage-length traffic.
Airlines experienced financial difficulties; however, commuter and regional airlines experienced relative worsening. According to projections for future fuel prices, the increase in current fuel prices would ultimately slow the expansion of the air industry, but overall operations would grow until 2025 (Atems, 2021). Nonetheless, high gas costs traditionally haven’t stopped people from making plans for the summer, so it is unlikely that the recent jump in gas prices would either, according to American Automobile Association AAA (Wang & Gao, 2020). And this cuts down the frequency of booking flights to wherever one deems a destination.
References
Atems, B. (2021). The response of the U.S. aviation industry to demand and supply shocks in the oil and jet fuel markets. Transportation Research Interdisciplinary Perspectives, 11, 100452.
Sibdari, S., Mohammadian, I., & Pyke, D. F. (2018). On the impact of jet fuel cost on airlines’ capacity choice: Evidence from the U.S. domestic markets. Transportation Research Part E: Logistics and Transportation Review, 111, 1–17.
Wang, H., & Gao, X. (2020). Oil price dynamics and airline earnings predictability. Journal of Air Transport Management, 87, 101854.