An “ideal storm” for airlines facing a strong US dollar and high oil prices From Reuters

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© Reuters. FILE PHOTO: A passenger plane is seen with the moon behind when it makes its final landing at Heathrow Airport in London, UK, September 25, 2018. REUTERS / Toby Melville

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By Jamie Fried

DOHA (Reuters) – Global airlines are battling a double blow from the rare combination of a strong US dollar and high oil prices at a time when widespread inflationary pressures and labor shortages are also pushing for a recovery in the pandemic-affected industry.

The price of oil and the US dollar usually have feedback, so when one is high, the other is low, which helps offset the financial impact on airlines operating in other currencies.

However, that link has broken in recent months with the war in Ukraine, which sparked a spike in oil prices at a time when the United States is a net exporter of oil and the US dollar is being boosted by rising interest rates to curb inflation.

Airlines gathering at the International Air Transport Association’s annual meeting in Doha this week have expressed concern about the simultaneous rise in the price of oil and the US dollar.

“It’s not good for airlines at all. It’s the perfect storm,” said Tony Weber, a former chief economist at Qantas Airways in Australia.

The trade-weighted US real exchange rate index, established in 2006, is at a record high, with a reference price of about $ 115 a barrel.

Airlines outside the United States have exposure in dollars in the form of oil prices, aircraft purchase and leasing fees, maintenance costs and sometimes debt, all of which become higher in their local currency when the dollar is stronger.

“It’s painful to buy fuel, to buy everything,” Korean Air Lines Co Ltd CEO Walter Cho said of the strong US dollar, trading at the highest level against winners for more than a decade.

“We have a lot of debt in US dollars and we have to pay interest on it. The interest rate is low, but at this exchange rate it may be 10%,” he said on the sidelines of a meeting in Doha.

For most non-US airlines, the impact of rising costs far outweighs the benefits of selling tickets to US-based customers who convert to more local currency.

Indian low-cost carrier SpiceJet warned last week that it would have to raise tariffs by 10% to 15% due to rising fuel prices and the depreciation of the rupee.

Malaysia Airlines CEO Izam Ismail said fuel typically accounted for 20% of its cost, but that it had risen to 45% in part due to low ringgit.

U.S. airlines are mostly unhedged and want lower oil prices, but prefer a lower dollar because they take advantage of a higher exchange rate when selling tickets in euros and other currencies to foreign customers, Weber said.

Hawaiian Airlines CEO Peter Ingram said the airline was watching the yen, trading at a 20-year low as it increased flights to Japan, traditionally Hawaii’s largest foreign travel market.

“This is not a binding demand constraint at the moment, but it is something we certainly have in mind, as most of the traffic on our flights, plus or minus 90%, is traffic of Japanese origin,” he said. for the yen. “And so the cost of travel to the United States will be inflated by the exchange rate.”

Airline failures have historically increased at times when the index, which combines the price of oil and the strength of the US dollar, was high, according to data from the consulting airline IBA.

IBA chief economist Stuart Hatcher said at a webinar last month that strong retained demand means there have been few setbacks this year, but that could change once the peak summer season is over.

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