American Airlines is expecting an expense increase in the first quarter of 2022 due to the significant rise in the price of crude oil in the last few weeks. However, it could be offset by a strong improvement in bookings, the airline said at the J.P. Morgan 2022 Industrials Conference. Let’s investigate further.

Geopolitical uncertainty

Global jet fuel prices have surged in the last few weeks, averaging a 19.5% increase in comparison with a month ago, according to data provided by the International Air Transport Association (IATA). This has led American Airlines to update its financial and operational guidance relating to the first quarter of 2022.

Oil prices have increased to their highest since 2008 due to several factors, including Russia’s invasion of Ukraine.

American Airlines currently expects to pay an average of between US$2.73 and US$2.78 per gallon of total jet fuel (including taxes) in the first quarter, said the carrier in a report to the United States Securities and Exchange Commission.

Currently, American Airlines does not have any fuel hedging contracts that would allow it to hedge its fuel consumption. The airline added,

“As such, and assuming it does not enter into any future transactions to hedge its fuel consumption, the company will continue to be fully exposed to fluctuations in aircraft fuel prices.”

Improvement in revenues

Despite the current uncertainty and rise in fuel prices, American Airlines expects a substantial increase in revenues due to more bookings as international air travel demand recovers.

American Airlines revenues have much improved versus what the airline projected in its guidance, said Doug Parker, the carrier’s chairman and CEO. According to him, the airline's revenues are currently around 83% of 2019 levels, compared to the projected 78%.

Business demand is as strong as ever, he added. American Airlines had three record days last week in terms of bookings, surpassing by 15% their previous numbers.

The airline's management further added that there is huge pent-up demand for international travel, and hearing the news worldwide like UK’s announcement that it will remove all COVID-19 travel restrictions was excellent news.

The airline expects the improvement in revenue to more than offset the increases in fuel and other expenses in the quarter. Doug Parker said,

“In 2010, oil prices were around US$80 per barrel; the airline industry made US$4.8 billion, which was a record in earnings for the industry. Next year, oil prices went up to US$111.26 per barrel. Earnings fell. It takes a while to react. The reaction to higher oil prices is less capacity and higher prices. So when it runs up quickly like it just did, it takes a while to respond, but we respond, and indeed, in 2012, we got back nearly to 2010 revenue levels. We can make money with oil prices of US$100 or higher, and we will. That’s not a long-term impact on the industry’s ability to make money.”

Other factors

The rise in fuel prices is not the only factor that could lead to a short-term impact on American Airlines’ bottom line.

Doug Parker stated that having fewer aircraft than previously expected would also impact the airline’s plans going forward. American Airlines had expected to receive 13 delayed Boeing 787-8 aircraft in 2022. Nonetheless, due to ongoing delays in the resumption of deliveries of these planes, American expects only to have ten new B787-8 this year.

The second short-term impact for American Airlines and the industry as a whole is a shortage of pilots.

The lack of cockpit crew is not expected to fully impact American since the airline is able to recruit new personnel from regional carriers across the United States. Nevertheless, the country needs more pilots “as we are depleting the ranks of the regional carriers faster than they can recover,” said Parker.

Do you expect fuel prices to hit the airline’s bottom line this quarter? Let us know in the comments below.