Fuel Crisis Threatens to Ground Airlines
The Iran war’s disruption to global fuel supplies has sent prices soaring for airlines
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The Iran war’s disruption to global fuel supplies has sent prices soaring for airlines that have subsequently chosen to cut back on expansion plans. Industry-wide growth plans for April have been dropped from a planned 5.4% to just 0.2%. The closure of the Strait of Hormuz - a stretch of water that is necessary for transport from key countries like the UAE and Saudi Arabia - has disrupted roughly 20% of global crude oil supply.
Korean Air, the largest and state-owned South Korean airline, has noted that it has entered emergency mode after fuel costs more than doubled. Fuel costs now constitute over 50% of total operating costs for the business. Other global airlines are cutting international routes or announcing fare increases.
The airline industry already operates on razor-thin profit margins, and so a large swing in fuel costs can easily turn profitable flight routes into loss-makers for airlines.
The airline industry is particularly vulnerable to this geopolitical climate because: fuel prices doubled so quickly, jet fuel degrades quickly in storage making stockpiling impossible, and travellers are price-sensitive so costs cannot be passed on to them so easily.
And the UK and Europe’s exposure to this issue is also particularly pronounced because European countries deliberately shifted their dependence on fuel imports from Russia to Middle Eastern suppliers following the Russia Ukraine invasion.
What does this mean for the airline industry?
- Airlines are facing an immediate profitability crisis which will have to be resolved through route cancellations and potential workforce reductions.
- Fuel suppliers will gain pricing power in this market, but may face reputational or regulatory risk if they are seen to be taking advantage of a crisis situation.
- Europe’s structural dependency on imported fuel might trigger government intervention if fuel shortages threaten airport operations or economic connectivity
How to use this in applications
Airlines entering into crisis mode generate immediate work for the Restructuring and Employment teams at law firms, as airlines slash costs to keep themselves afloat. Legal teams may advise on cost reduction methods like cancelling routes and the associated contractual issues, and workforce measures like pay cuts or redundancies.
Law firms will also have to help advise on aircraft leases as airlines choose to ground fuel-inefficient planes instead of flying them at a loss. Despite this, lease agreements will require regular rental payments, and so the Finance or Restructuring teams at law firms will have to advise airlines on the negotiation of payment deferrals or early lease termination options.
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