As the war in Iran approaches its fifth week, the shock to transportation and travel costs from surging jet fuel prices is coming into view.
The effect will be significant: Corporate business travel will be scaled back, fewer tourists will visit the United States and American families will scale back their summer travel plans.
Long lines at airport security checkpoints, because of a funding impasse over the Department of Homeland Security, are only making matters worse.
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Expect the cost of business travel to increase by 15% to 20% in the near term. International travel will increase by far more, with the potential for demand destruction if prices go even higher.
The strain extends beyond price increases. In Asia, the increase has already resulted in fuel hoarding as many economies have a limited supply of fuel reserves to cover basic import needs.
It’s an example of how leaders are making decisions on allocation that were hard to imagine before the war began.
But if things worsen, the challenge won’t end there. The next step? Rationing in Asia and Europe.
Still, it’s difficult to know how far this energy shock goes.
The heterogenous nature of U.S. business, the uncertainty over the war’s duration and the damage to oil and gas production capacity in the Middle East all prohibit a definitive estimate of the total cost of the energy shock.
But that doesn’t mean firms are standing idly by.
United Airlines’ chief executive, Scott Kirby, recently said that he anticipates the company would pass through to consumers the rising jet fuel costs, which are up 113% this year. Kirby added that United was cutting 5% of capacity on unprofitable routes.
United is just one example, albeit a prominent one, of the choices that all businesses face as energy costs rise:
- Accept thinner profit margins.
- Pass along price increases to consumers.
- Lay off workers.
Analysis by S&P Global suggests that Europe, followed by Africa, is the most dependent on jet fuel from the Middle East. But higher jet fuel prices will affect every carrier.
The challenge extends beyond passenger airlines. Although only 1% of global freight is shipped by air, jet transport accounts for a third of its value.
When jet fuel prices in Singapore rise by more than 180% since the beginning of the year, that cost will eventually result in higher inflation while subtracting from corporate earnings.
All of this strain will be on vivid display when the U.S. inflation data for March and April is released in the coming weeks.
