Aftermath: How the War Might Cancel Your Flight

This story was first featured in the Aftermath newsletter, a series from David Dayen exploring the economic consequences of the war in Iran. To have these stories delivered to your in-box as soon as they are published, sign up for the newsletter here.

---

Welcome back to Aftermath! You can see this entire series at prospect.org/aftermath. And you can sign up there to receive every edition of the newsletter in your in-box. Tell a friend!

Today, we’ll talk about jet fuel, the good news/bad news situation for China, and more.

Are We Still at War?

For the time being, yes. The U.S. blockade of the Strait of Hormuz is starting to actually work, though the Iranian fuel kept in floating storage or already on the ocean is unaffected. Of course, the products a blockade does prevent from safe passage only deepens the damage to the global economy.

There has been talk of more talks between the U.S. and Iran, but nothing finalized.

Cooling Our Jets

I spent Wednesday in LAX and O’Hare Airport in Chicago, and things looked relatively normal. The (actually illegal) payments to TSA workers, despite lapsed appropriations to the Department of Homeland Security, meant that metal detectors were running full-speed, and my flight was full.

Yet my travel was significantly more expensive than the airline expected when I booked the trip. On February 27, jet fuel prices were $2.50 a gallon; by the beginning of April, they were at $4.88, per estimates from the Argus U.S. Jet Fuel Index. We’ve been getting nervous about oil prices at around $100 a barrel; jet fuel is at $205 a barrel. And about eight million barrels are used globally every day.

As this excellent explainer from Gulf News details, jet fuel is refined only in specialized locations that produce aviation-grade kerosene, which is then treated and purified. Some of the biggest jet fuel refineries are in the United Arab Emirates, Saudi Arabia, Kuwait, and Qatar; those facilities are either damaged or cannot ship their product out because of the closure of the Strait of Hormuz. Countries that do refine jet fuel, like China, have stopped exporting to countries that don’t refine it, conserving it for their own domestic use.

So rather than an oil supply problem, it’s more of a refining capacity problem. And like everything else involving the strait, it will take months to get back to normal even if the war stops tomorrow.

More than 20 percent of refined jet fuel goes through the strait, but that concentration is much higher for Asia and Europe; the latter gets at least 40 percent of its product from the Middle East. Separately, Gulf locations have been largely off-limits to passenger planes during the war, which forces rerouting and usually longer-haul travel, which uses more jet fuel.

If you’re an airline, your two biggest costs are labor and jet fuel. The latter accounts for between 25 and 35 percent of airline operating expenses, and there’s no real way to reduce the cost other than limiting weight on the plane. You can do a little of that with higher baggage fees, but realistically, flying the plane only gets cheaper with fewer people on it, and that means fewer paying passengers.

This crisis is even bigger than price, however; shortages have already hit Asia, and will hit Europe within a few weeks, according to estimates. The European Commission has insisted that this is not the case, but industry analysts have contradicted them, saying that the full impact will hit in May and June, precisely at the beginning of peak tourist season, which is a huge economic bonanza for the continent.

A spillover effect comes from the fact that some airports may have more fuel available than others. This leads airlines to “tanker” fuel by carrying it from one airport to the next. This can knock out other cargo and make aviation shipping supply-constrained and costlier.

Airlines are reacting in a couple of ways. First, they are canceling uneconomical flights. The Hill identified flight cuts at Air New Zealand, SAS, Vietnam Airlines, and United, which has planned a 5 percent cut in the second and third quarters of the year. About 7 percent of all global flights were canceled on April 13. Cuts would be more severe in Asia and Europe if the strait closure drags on, and airlines there are already in the planning stages.

The second reaction is much higher prices. That includes higher baggage fees, which every major U.S. carrier has done, and fuel surcharges; Air France just added a 50-euro fee for jet fuel costs. But most airlines just build those costs into the base fare more invisibly, and as a result summer travel is likely to be extremely expensive. That’s tricky, because the more you increase fares to cover jet fuel, the more passengers decide not to take that next flight, which eats into revenues.

It’s hard to know where the higher prices from jet fuel end and the higher prices taking advantage of the opportunity begin. Groundwork Collaborative listened in on earnings calls at major U.S. airlines; importantly, the U.S. does refine jet fuel, so shortages are not an issue here. “The revenue environment is really strong … in a way, like, it’s an opportunity for us,” said United CEO Scott Kirby in a March call. “Our revenue performance is improving at a rate greater than we had originally anticipated,” American Airlines CEO Robert Isom said on the same day.

Some of this is just CEOs sighing in relief that higher prices aren’t yet reducing customer demand. But there’s little question that it’s you and me, not the airlines, who will feel the impact of the war. “The speed in which you’ve seen [higher fares] in just the past two to three weeks has, I think, put a lot of credibility that the industry wants to make money,” said Joe Esposito, chief commercial officer at Delta Air Lines, on their recent earnings call last month. Lindsay Owens, executive director at Groundwork, said that executives are “following the COVID-era corporate playbook” of jacking up prices opportunistically.

There aren’t a lot of alternatives available. Sustainable aviation fuel, made from used cooking oil and other waste by-products, only produced the equivalent of 0.6 percent of global jet fuel consumption last year. It’s also more expensive, though the gap between that and traditional jet fuel is obviously going down. More problematically, there aren’t enough ingredients or certified refineries to scale up.

Among all the consequences of the war, cascading flight cancellations for European or Asian vacations will be among the most visible.

China Contains Multitudes

It’s easy to make a case that China is poised to rule the 21st century economically, and the war makes that more likely. The Chinese have dominated “electrotech,” the various industries of solar components, wind turbines, batteries for energy storage, and electric vehicles that are core to the energy transition. Whatever inroads the U.S. was making into these markets were hobbled by Donald Trump’s effective repeal of the Inflation Reduction Act.

I agree with all of that. But this Chinese dominance will play out over the medium and long term. Over the short term, there’s a reason that China’s foreign ministry has called the Iran war, and the U.S. blockade in particular, “dangerous and irresponsible.” Because they are a victim of the supply shock as well.

Beijing is the world’s largest purchaser of Iranian crude oil, for starters, so the blockade is of particular interest to them. But more generally, China needs imports of oil and gas to both run its factories and derive component products, known as feedstocks, to make plastics, carbon fibers, fertilizer blends, benzene, and more. Prices are going way up for these components, and shortages are ensuing. As the Prospect has reported, China already prohibited exports of sulfuric acid because of shortage risks, and more export bans could proceed.

With China serving as the world’s manufacturing champion, loss of these components hit everyone hard, as exports of finished goods could suffer. And like the COVID supply shock, this should make countries wonder if outsourcing their supply chains was the right move. China is somewhat desperately trying to hold off such questions. This week, the State Council issued new regulations that would allow officials to investigate foreign multinationals that try to move supply chains out of the country, and even sanction individual employees and bar companies from leaving. This is more in response to moves in the West toward decoupling supply chains from China in recent years, but the timing of the war, another event that could spur such desires, is notable.

The aggressive maneuver is a recognition of how crucial industrial manufacturing is to China. It could easily spur a backlash and precisely the trade pullback it seeks to prevent. So as much as China is in position to win the future, it may lose the present.

The post Aftermath: How the War Might Cancel Your Flight appeared first on The American Prospect.