The impact of jet fuel shortages because of the closure of the Strait of Hormuz is starting to burn. Lufthansa has canceled 20,000 flights and experts warn more cancellations and price hikes are on the way.
On Tuesday, April 21, Germany's largest carrier Lufthansa announced it had canceled 20,000 flights between May and October to try and save fuel.
The airline said the short-haul flights being cut would remove "equivalent to approximately 40,000 metric tons of jet fuel, the price of which has doubled since the outbreak of the Iran conflict." Dutch airline KLM last week canceled 160 flights for the coming month, while other airlines in Europe and across the Asia-Pacific region are raising prices and grappling with the possibility of mass cancellations as the summer holiday period draws nearer.
The ongoing closure of the Strait of Hormuz has severely disrupted global gas and oil flows. Europe's aviation sector is particularly exposed, as much of the kerosene the region imports for jet fuel comes via the Middle East.
Fuel supplies running low However, there is some disagreement over how quickly supplies could actually run out. On Monday, the Dutch government said it estimated the EU had enough kerosene for jet fuel and other purposes, such as heating and lighting, for at least five months.
The Netherlands is home to some of Europe's largest crude oil refineries, many of which import kerosene and produce jet fuel. The EU produces between 60% and 70% of its jet fuel, while importing 30-40%, around half of which comes through the Strait of Hormuz .
"It's a serious warning indeed and a clear call to action," Rico Luman, senior transport economist with ING, told DW. He thinks the six-week estimate could well prove to be accurate and believes EU plans for fuel sharing may have to be implemented.
"The principle of solidarity is deemed important in contingency plans and in practice this will come down to fuel sharing between hubs and countries," he said.
What are the EU's plans?
EU transport ministers met on Tuesday to discuss plans to deal with jet fuel shortages and to provide guidance to airlines. The bloc's Transport Commissioner Apostolos Tzitzikostas said a prolonged blockage at the Strait of Hormuz would be "catastrophic" for Europe and the global economy.
The European Commission will present a package of energy and transport measures on April 22, including plans for the collective management of jet fuel stocks and the potential distribution of existing supplies among member states.
Another measure being considered is allowing member states to buy more jet fuel from the US. "In case this crisis continues, we are ready to intervene and make things more flexible for the airlines," Tzitzikostas said.
Alternatives in short supply The crisis has shone a light on airlines' vulnerability to supply shocks, particularly in Europe and Asia, where dependence on kerosene coming from the Middle East is high.
In a report last November by the International Air Transport Association (IATA) , a trade body for the airline industry, it warned that "Europe's jet fuel supply resilience has weakened as reliance on imports grows." It said the sector was especially dependent on conventional jet fuel and urged industry stakeholders to step up the use of sustainable aviation fuel (SAF), which are biomass-derived fuels from plants, animals, or waste.
"There's not many alternatives available for the aviation industry," said Luman. "Shifting more to SAF as a substitute isn't realistic given available supply. Moreover, prices of SAF have surged alongside jet fuel." High prices and instability the new normal Even if the supply of jet fuel doesn't completely dry up, soaring prices are likely to be here to stay, pushing airline tickets up for consumers.
While many major airlines engage in jet fuel "hedging," a strategy where they lock in future prices to guard against volatility, some had moved away from the practice in recent years, according to Yi Gao, an associate professor at the School of Aviation and Transportation Technology of Purdue University.
He says airlines have been warning consumers for years about how energy price hikes could impact fares at short notice. "They are very subtly delivering this message to the public: please buy your ticket now." In terms of a route out of the crisis, Luman said the only realistic short-term fix, assuming the Strait stays closed, is the reduction of fuel consumption. He foresees more cancellations as part of an emergency plan and says price hikes are inevitable.
"It's a global market and a fight for jet fuel starts when supply further tightens," he noted.
He points to the example of Asia, where jet fuel prices are already much higher and traders sell to those paying the highest price. Hong Kong's Cathay Pacific, Air New Zealand and Malaysia's Air Asia X have already cut routes to save fuel, while other airlines there and around the world are also raising prices and introducing fuel levies.
The crisis has once again shown the vulnerability of the sector to geopolitical events and risks damaging consumer confidence, a vital concept in aviation.
"It just shows how fragile this industry really is," said Gao. "Its operation is based on so many assumptions like stability, availability of airspace, and the relative affordability of fuel." Edited by: Srinivas Mazumdaru Advertisement
