Why airfares won’t jump after the attacks on Saudi Arabian oil facilities

Sep 16, 2019

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The attacks on oil production facilities in Saudi Arabia over the weekend may have taken a bite out of global supply, but that is unlikely to translate to higher airfares anytime soon.

The attacks reportedly took out about half of state-owned Aramco’s production, which amounts to roughly 6% of global oil supply.

Markets responded in kind. The spot price of Brent crude, the global measure of oil prices, jumped nearly 11% to $67.61 per barrel at 11:20am on Monday compared to its close on Friday before the attacks, according to Bloomberg data.

“There is little the airlines can do to offset the near-term impact,” wrote Cowen analyst Helane Becker in a report on oil prices Monday. “Fares track fuel on a [two] to [six] month lag depending on the competitive environment.”

Related: How much are the 737 MAX cancellations affecting travelers? Not much.

A long-term impact likely would result in higher airfares or, if airlines are unable to raise ticket prices, lower capacity growth, she added.

However, few see a lasting impact on oil prices from the attacks in Saudi Arabia.

“If it’s going to be five, six or seven days, we won’t see much impact,” Bijan Vasigh, a professor of economics and finance at Embry-Riddle Aeronautical University, told TPG Monday. “They [already] said one-third is back today… I don’t think this is really a long-term impact.”

American Airlines, JetBlue Airways and Spirit Airlines are seen as the carriers most exposed to the price of oil, according to a Macquarie report Monday. Neither American nor Spirit hedge fuel prices, leaving them vulnerable to market fluctuations.

On the flip side, Macquarie views Alaska Airlines, Delta Air Lines and Southwest Airlines as the least exposed to changes in oil prices. Alaska and Southwest maintain fuel hedges, while Delta’s Trainer Refinery insulates it from price changes.

Fuel made up about a fifth of airline operating expenses in the second quarter, according to U.S. Department of Transportation data.

Airfares are likely to stay in a holding pattern for the time being. That said, fares are already high with Boeing 737 MAX capacity grounded and U.S. demand robust.

Additional reporting by Michael Park.

Featured image by Luke Sharrett/Bloomberg via Getty Images.

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