The jump in oil prices to around $120 per barrel following Russia’s invasion of Ukraine is a material near-term risk for airlines.

Jet fuel represents one of the airlines’ largest expenses at 20%-40% of total costs. Most carriers' fuel costs are unhedged or have a hedging ratio lower than pre-pandemic levels.

Airlines have proven their ability to stay profitable when oil prices are high (2011-2014) by charging a fuel surcharge or higher ticket price. However, margins and cash flows in 2022 will likely be weaker than we expect if crude prices continue to rise.

Airline cost structures are already under pressure, as carriers are still recovering from pandemic lows and are not yet flying at full capacity. In addition to soaring jet fuel prices, airlines are also experiencing upward pressure on wages and airport costs, while catching up on maintenance items deferred during the pandemic.

In short, although the borders are opening up and travel has resumed, challenges remained for airline companies.