War will test limits for airlines and passengers, says Quest

Commercial aviation is experiencing a kind of Sisyphean curse. Whenever the sector seems to enter a sustainable path, the forces of geopolitics and economics push the stone down the mountain. After overcoming the pandemic, the war pulls the industry into a new crisis.

The incisive diagnosis is from Richard Quest, CNN's main economic anchor in the United States and recognized as one of the greatest experts on commercial aviation in the world.

"Demand is strong. People still want to travel for business, visit friends and relatives. There is still a desire to travel that moves people. The problem, of course, is that prices are much higher, and this will really have an effect", he told CNN Brasil during the annual meeting of IATA (International Air Transport Association), which takes place in Rio.

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To understand the gravity of the situation, Quest breaks down the numbers of an airline. QAV (aviation kerosene) historically accounts for around a third of all operating expenses of companies in the sector.

When a barrel of oil suffers a continuous rise in price - as it is currently, the impact on cash flow is immediate and devastating. Quest recalls that, at its recent peak, oil was 70% more expensive than it was before the war.

In practical terms, aviation operates under a very high fixed cost structure (aircraft leasing, crew salaries, airport taxes) and a single large, highly volatile variable: fuel.

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When this variable skyrockets, the margin for maneuver - and profit - evaporates, making the transfer to tariffs a matter of survival for companies.

To date, the market is witnessing consumer resilience.

The increase in aviation kerosene will reach the end consumer, says expert | MORNING CALL

The limit to price increases
Quest assesses that, driven by strong pent-up demand and the desire to travel again, passengers have accepted paying more expensive fares. However, there is a tipping point at which the ticket price stops being an acceptable financial burden and becomes an exclusion factor.

"How much more are you willing to pay before you say 'I'm not going to do this trip'? Probably 20% to 30%... People seem to still be happy to pay that and it's going to be a strong summer in the Northern Hemisphere. But in the long term, if prices stay up there, I think that will change," he said.

The mathematical consequence of this energy shock is purely financial. Quest assesses that the industry is tough, but the current financial situation is critical.

"We've had oil crises before. This industry is very used to all forms of crisis. It's dealt with volcanic ash, with wars, earthquakes and all kinds of things. So, they're going to take it away. Now, once again, profit margins are going to fall. So, we're back in the doldrums and some airlines are going to go bankrupt," he said.

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Source: CNN