Fuel, the factor that defines airline profitability

Jet fuel remains the main operating cost for airlines, representing 29.1% of the total in Latin America and the Caribbean. This dependence makes the industry especially vulnerable to the volatility of energy prices, where not only the price level reached matters, but also the speed and unpredictability of the changes.

In recent months, the conflict in the Middle East and the closure of the Strait of Hormuz have generated significant market tensions, driving fuel prices up by as much as 200% in some markets and jeopardizing supply. This situation directly impacts company profitability, as costs rise immediately, while revenues take longer to adjust.

Recent experience shows that during periods of crisis—such as 2008, 2020, and 2022—spikes in fuel prices led the industry to zero or negative margins. In contrast, between 2015 and 2019, a more stable environment allowed airlines to adapt and maintain positive margins of around 7%.

Furthermore, jet fuel prices tend to track Brent crude oil prices in the long term, although with greater volatility during periods of tension. In this context, the crack spread—the difference between the price of refined fuel and crude oil—has widened, reflecting persistent pressures linked to both geopolitical conflicts and refining capacity constraints.

“Airline costs are highly variable and are determined by changes in fuel prices, taxes, and labor. In particular, fuel costs depend heavily on fluctuations in the global price of a barrel of oil,” said Paula Bernal, Country Manager of IATA Colombia.

In Latin America, this situation is exacerbated by the high tax burden in some markets, such as Colombia, where rising energy costs affect both demand and competitiveness. According to the sector, measures such as reducing VAT on tickets and fuel have proven effective in stimulating the market, reinforcing the need for structural policies that alleviate pressure on the industry and strengthen air connectivity.

Source:
IATA – Sustainability & Economics (WATS) / S&P Global Energy Platts