‘Perfect storm’ for airlines coping with strong US dollar and high oil prices

Non-US airlines have exposure to the dollar in the form of oil prices, aircraft purchase and lease costs, maintenance costs, and sometimes debt, all of which increase in their local currency when the dollar strengthens.

“It’s painful to buy fuel, buy everything,” Walter Cho, chief executive of Korean Air Lines, said of the strong US dollar, which traded at its highest level against the dollar gained in more than a decade.

“We have a lot of debt in US dollars and we have to pay interest on that. Interest is low, but at this exchange rate it might as well be 10 percent,” he said on the sidelines of an airline industry meeting in Doha.

For most non-US airlines, the blow of rising costs far outweighs the benefit of ticket sales to US-based customers converting to more local currencies.

Indian low-cost fighter SpiceJet warned last week that it would have to raise tariffs by 10 to 15 percent due to a rise in fuel prices and the depreciation of the rupee.

Malaysia Airlines Chief Executive Izham Ismail said fuel typically accounted for 20 percent of costs, but had risen to 45 percent, partly due to weak ringgit.

U.S. airlines are usually unhedged and want a low oil price, preferring a weaker dollar because they benefit from a higher conversion rate when selling tickets in euros and other currencies to foreign customers, Webber said.

Hawaiian Airlines chief executive Peter Ingram said the airline was watching the yen, which traded at a 20-year low, as it ramped up flights to Japan, traditionally Hawaii’s largest foreign tourist market.

“It’s not the binding restriction on demand right now, but it’s something we’re definitely taking into account as the vast majority of traffic on our flights, plus or minus 90 percent, is Japanese traffic,” he said of the yen. . “And so the cost of traveling to the United States will be driven up by the exchange rate.”

According to data from aviation consultancy IBA, the number of bankruptcies has risen in the past during times when an index that combines the price of oil with the strength of the US dollar has been high.

IBA chief economist Stuart Hatcher said in a webinar last month that strong pent-up demand means there have been few outages this year, but the situation could change once the summer season is over.