Skift Take

Russia's invasion of Ukraine will ripple throughout the airline industry, most immediately through high oil prices and airspace closures. But if the West and Russia trade sanctions and restrictions, easy flights between North America, Europe, and Asia could be a thing of the past.

Ukraine Coverage

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Global airlines could face severe disruptions from Russia’s invasion of the Ukraine that could escalate if the West and Moscow volley sanctions at one another.

Airlines, like Ryanair, Wizz Air, and Qatar Airways which as recently as Wednesday were flying to Ukraine, announced Thursday morning that flights to the country had been cancelled. Ukrainian airspace and the airspace over parts of Russia were closed to commercial traffic overnight. “Due to the closure of Ukrainian airspace overnight, and the apparent invasion by Russia forces, all Ryanair flights to and from Ukraine have been suspended for at least the next 14 days,” Ryanair said in a statement.

Hungary’s Wizz Air is scrambling to evacuate several personnel and to move at least four aircraft stranded in Ukraine, Bloomberg first reported. It remains unclear how operational Ukraine’s airports are. Overnight reports from the ground suggested that Russia shelled Kyiv’s main international airport and had targeted military and civilian airports around the country. Airline Weekly has been unable to independently confirm these reports.

The outbreak of war will hammer an airline industry still hobbled by the Covid-19 pandemic and spread far beyond the conflict zone.

In a worst case scenario: If the West imposes its most severe sanctions, Russia could retaliate by closing its airspace to overflights, disrupting air traffic between Europe, North America and Asia and wreaking havoc for flyers.

The effects of the conflict already are making themselves known. Oil prices surged past $100 per barrel for the first time since 2014 and are expected to rise even further, especially if the West sanctions Russian oil production. In their fourth-quarter earnings calls earlier this year, airlines had warned that rising oil prices — then well below $100 per barrel — could put a brake on their 2022 recovery plans. Air France-KLM warned last week that an outbreak of hostilities would put “tremendous” pressure on oil prices and could derail the Franco-Dutch group’s plans for recovery this year.

Oil industry analysts are warning that todays’ Brent crude prices of $104 per barrel are only the beginning. The price for crude could shoot north of $150 per barrel, some economists warn. When this last happened — in 2008 when oil prices shot to $147 per barrel — it dealt a traumatic blow to the airline industry, causing airlines to slash flights and helping precipitate consolidation in the U.S. and Europe. Russia produces about 10 percent of the world’s oil and supplies about one-third of Europe’s natural gas. Western leaders are calling on the Organization of Petroleum Exporting Countries to increase the supply of oil to offset the potential loss of Russian supply, but the cartel has not acted yet.

Airlines will feel the effects of higher energy prices almost immediately, if they are have not hedged against the expense. But consumers will begin to feel the prices shortly. Natural gas in much of Europe has jumped more than 60 percent in the hours since the invasion began. The downstream effect of this surge are higher inflation and less discretionary income for European consumers, bringing into question airlines’ previously rosy outlooks for the peak summer travel season.

The scope of sanctions that the U.S., the European Union, the UK and Japan are considering remains unclear. One possible sanction U.S. President Joe Biden has threatened is barring Russian banks from the SWIFT network, which executes bank transactions worldwide.

Overflight Chaos

Russia charges global airlines hundreds of millions of dollars per year in overflight fees for flights crossing its airspace en route to Asia. These transactions are not handled by the international, interbank payment network called SWIFT — processed instead through a different financial mechanism at the country level administered through the International Air Transport Association (IATA). This so far has not been targeted by Western sanctions, but that could change as the crisis develops and Western governments seek to use all their financial tools against Russia’s aggression, airline industry analyst Robert Mann said.

But overflight permits present an even thornier problem for airlines if the conflict escalates. U.S. flights to Asia already are being rerouted to avoid Ukrainian airspace and the closed parts of Russian airspace. Airlines started curtailing night overflights of Ukraine in 2014 after Malaysia Airlines Flight 17 was shot down by Russian-backed separatists in Eastern Ukraine, IATA said. Daytime overflights have continued, however.

But a broader closure of Russian airspace or the cancellation of overflight permits will disrupt flights to Asia, particularly from Europe.Data from FlightRadar24, a flight tracking site, show virtually no flights over Eastern Europe on Thursday, from the Polish border and extending over Belarus, Moldova, Ukraine, and Southwestern Russia. Instead, traffic is being rerouted south, over Romania and Turkey and the southern Black Sea.

During the Cold War, U.S. flights to Asia avoided Soviet airspace by flying via Anchorage, a route that adds many hours to Asia-bound flights. Russia is notoriously slow to approve overflight permits. Last year, American Airlines’ New York-Delhi flights took hours longer than planned due to Russia not issuing permits in time for the route’s launch. Cancelling permits altogether for Western airlines could be a viable Russian retaliation against financial sanctions, even if it deprives the Russian treasury of hundreds of millions in fees.

Some flights will be not be financially viable to operate if they are forced to take this route, or the transit time could deter passengers from choosing to travel. Flights from Europe to Asia could be re-routed to the south or west, adding hours to travel time and necessitating refueling stops. The one silver lining is that air travel demand to Asia remains depressed as severe pandemic-related travel restrictions endure in the region.

But what remains unknown is how far these closures may spread if the war escalates. If airspace is restricted over the Black Sea in the south and the Baltic Sea in the north, or if passengers feel it is unsafe to travel over those regions, Europe’s airlines could pay a steep price. “This quickly could become a more global problem,” Mann said.

November 16, 2022
Dallas-Fort Worth, TX and Online
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Tags: airlines, ukraine