Article Summary: UBS points out fuel costs account for about 30% of airline operating expenses. If fuel remains high long-term, airline earnings may face downgrade risk; hedging and price increases cannot fully offset.
UBS View: High Fuel May Bring Downward Pressure on Airline Earnings
UBS said the airline industry narrative has shifted: post-pandemic capacity constraints have improved pricing power for Asia-Pacific carriers. However, in the short term, airline earnings will inevitably face pressure. The Middle East conflict has led to a significant rise in fuel prices and may cause fuel supply tightness.
Fuel Cost Share and Countermeasures: Raising Fares, Cutting Flights, Adding Surcharges
UBS Asia Transport Analyst Yu Peng Yang said fuel cost is generally one of the largest cost items for airlines, averaging about 30% of total operating expenses. If fuel prices remain high for an extended period, airline earnings could face significant downgrade risk.
To alleviate cost pressure, airlines have taken multiple measures:
- Raise fares (but may impact load factor depending on price elasticity of demand);
- Cut flights (especially less profitable routes);
- Increase fuel surcharges to hedge, but still difficult to fully offset the impact of rising oil prices.
Demand and Supply Impact: Passenger Flow Shifts to Asia, Profit Recovery Depends on Fuel and Capacity
On the other hand, due to the Middle East conflict, some passenger flow originally carried by Middle Eastern airlines has shifted to Asian carriers, significantly improving demand on European routes.
In a scenario without an economic recession, and given continued tight supply of aircraft and flights, once fuel cost pressure eases, UBS expects airline profitability to recover quickly.
Relatively speaking, Yang noted that airlines with lower demand elasticity (e.g., higher proportion of business travel), higher fleet fuel efficiency, and more effective fuel hedging strategies are expected to have better resilience and competitive advantage. He said that due to insufficient fleet supply, the medium to long-term outlook for airline earnings is positive.
(Reporter Lin Defen)
