SINGAPORE - Higher airfares for now are inevitable, with oil prices high and jet kerosene prices even higher at a time when jet fuel manufacturers have yet to return to pre-pandemic levels of production, said the director-general of the International Air Transport Association (Iata).
Airlines have had to raise fares by at least 10 per cent just to offset the surge in fuel cost, their biggest expenditure outlay, Mr Willie Walsh said.
"Jet fuel prices are leading to very significant increases in costs for airlines. Given the financial performance of airlines, there is just no way an airline can absorb that additional cost," he said at a media briefing on Monday (May 16) ahead of the Changi Aviation Summit this week.
But there is no evidence the higher airfares have deterred people from travelling, Mr Walsh noted. "There is strong pent-up demand for travel. People have saved money and they are prepared to spend that money."
Airfares here and globally have surged with air traffic on the rebound. A return ticket on Singapore Airlines (SIA) to London from June 20 to July 10 is now going for about $3,200, up from $1,800 pre-pandemic.
The fare increase has ranged from 20 per cent to 80 per cent since Singapore reopened its borders in April, amid passenger volumes doubling at Changi Airport to reach 40 per cent of 2019 levels.
Mr Walsh said the cost of jet fuel now averages 30 per cent to 33 per cent higher than oil prices in the first quarter of this year. Between 2010 and 2019, it averaged 17 per cent higher than oil prices.
With jet kerosene refineries now increasing their production, airfares should start coming down in the second half of this year, he said.
The aviation industry is adjusting to a faster-than-expected recovery of air travel, and is currently facing manpower and flight bottlenecks, which Mr Walsh characterised as "good problems" for the sector to have.
Potential headwinds such as high interest rates, high oil prices and recession are also more "business as usual" problems the industry is talking about only now that the pandemic has largely stabilised, he said.
Analysts said that more than oil prices, a more important factor for airfares is supply and demand of flights. Once more airlines schedule more flights, airfares will become more competitive.
Head of Asia at OAG aviation Mayur Patel said less competition on specific routes now has allowed some airlines to charge more.
SIA flights are also at a premium as the airline is Singapore's home carrier, with a much higher bargaining power in the market compared with foreign carriers at Changi Airport.
Mr Brendan Sobie of Sobie Aviation said South-east Asia has traditionally had an issue of overcapacity prior to the pandemic, and airlines operating here will likely continue to face this issue.
"It's not inevitable that fares will go up because of higher fuel prices. Airfares are a function of supply and demand," he said.
During his talk with the media, Mr Walsh also urged more traditional jet fuel companies to produce sustainable aviation fuels (SAF), which currently cost about three times that of conventional jet fuel.
He said the problem is not with demand as airlines used all of the available 100 million litres of SAF last year and have placed total orders of more than 14 billion litres in the years to come.
But Neste, the world's largest producer of SAF, said expected production capacity in the coming years may already have outstripped future demand, and that more needs to be done by governments to mandate SAF use.
Its production capacity will grow by 15 times to 1.5 million tonnes by the end of 2023, with up to one million tonnes to be produced in its Singapore refinery.
Mr Sami Jauhiainen, Neste's vice-president of renewable aviation in Asia-Pacific, said: "Investments in SAF production facilities are highly capital-intensive, requiring long-term certainty of market demand.
"The policy targets for SAF are modest compared to the expected growth in SAF production capacity. New SAF capacity investments are being announced by many others as well."
He added: "Governments can accelerate investments in SAF production by defining policy frameworks, such as mandates, that create the market for SAF."