Iran and Iraq Airspace Ban will Cost Airlines Dearly
On Saturday 11 January the EU's air safety agency (EASA) joined the American Federal Aviation Administration (FAA) in issuing an advisory to airlines to avoid flying over Iran and Iraq, after Tehran admitted mistakenly shooting down a Ukraine International Airlines B737, killing 176 people.
After days of denials, Iranian authorities finally acknowledged that air defences had brought the Ukrainian airliner down with missiles, blaming "human error." Iran's supreme leader Ayatollah Ali Khamenei has ordered his armed forces to address "shortcomings" so that such a disaster does not happen again.
Intense competition, a global economic slowdown, rising fuel prices and pressure from regulators to reduce emissions are some of the pressures already squeezing many carriers' profit margins. A protracted re-routing of commercial aviation from Iranian and Iraqi airspace will mean longer flights and higher fuel costs for long-haul carriers in the Asia-Pacific region. And that could translate into significantly higher prices for passengers.
"When you have an airspace closure, air transport and airlines see a significant impact to their operating costs and their flight times as a result of them circumventing airspace whilst finding alternate routes," aviation consultant Mark Martin said. "In such situations, the effective cost of tickets dramatically shoots up for the traveller by nearly 50%. The effective increase in flight time would be between 45 minutes to one hour depending on the type of aircraft," he added.
Approximately 1,000 commercial planes fly through Iranian and Iraqi airspace each day, Albert Tjeong, assistant director of corporate communications for the Asia-Pacific region at the International Air Transport Association (IATA), confirmed in a statement.
"At the moment many carriers in South-east Asia and Oceania have started to reroute their flight paths to Europe in line with the FAA and EASA's advisory," Shukor Yusof, founder of Malaysia-based aviation consultancy Endau Analytics, confirmed. "Long-term this will have an adverse effect on an air carrier’s bottom line as a new route requires extra fuel burn, and possibly a mid-point transit."
Oil prices initially surged on Wednesday to a near four-month high following the Iranian missile strikes on Iraqi military bases. Those were retaliation for the US strike that killed Qassem Soleimani, the leader of Iran's elite Quds Force. The markets have since stabilised as investors see a de-escalation in US-Iran tensions, at least for now.
But oil prices have been on a steady rise for months. Brent crude has risen nearly 23 % since early August, and they are up almost 37 % since the end of 2018, according to data by Refinitiv.
Oil prices are expected to rise further if tensions around Iran worsen, that would be bad news for the airline industry globally because it's going to influence fuel prices, and it will impact airlines profitability. Other consequences could include weakened consumer confidence in air travel and increased jet emissions.
In an industry outlook released every six months, IATA in December expressed optimism for the new year, forecasting the global airline industry will produce a net profit of $29.3bn in 2020, up 13% from a net profit of $25.9bn in 2019. IATA predicted Asia-Pacific carriers will be helped in 2020 by a modest recovery in world trade and air cargo, showing a $6bn net profit in 2020 (up from $4.9bn in 2019) for a 2.2% net margin, the ratio of a company’s after-tax profits to its revenue.
"Asia remains the manufacturing centre of the world and revenues from transporting many of those goods are a significant proportion of sales for many of the region's airlines," the IATA report said.
"But the trade war between the US and China is assumed just to be on hold; trade tariffs are not reversed. Consequently, the rise in trade and cargo volumes is moderate."
IATA says many airlines around the world are already struggling due to the global economic slowdown, trade wars, geopolitical tensions, social unrest such as in Hong Kong and lingering uncertainties surrounding Brexit. Despite the rosy headline profit figures, profit margins are tight. IATA estimates the projected 2020 net profit per passenger for Asia-Pacific carriers at $3.34, compared with a global average net profit per passenger of $6.20.
Major air carriers in South-east Asia, including Singapore Airlines, Thai Airways, Malaysia Airlines, and Hong Kong-based Cathay Pacific, struggled with financial difficulties in 2018 and 2019, according to their respective annual reports.
Hong Kong-based Cathay Pacific has had to defer delivery of some new planes as it struggles with a plunge in visitor arrivals to the city due to months of pro-democracy protests. Following Wednesday's early morning missile strike, British Airways, Singapore Airlines, Malaysia Airlines, Qantas, Germany's Lufthansa and Air France-KLM were among airlines charting new routes to go around Iraq and Iran.
Many flights have been avoiding Iranian and Iraqi airspace by taking a more northerly route over Afghanistan and Pakistan or a more southerly route over Saudi Arabia and Egypt. Among those still using Iranian and Iraqi airspace, which remains open, is Qatar Airways, which is banned from flying over Saudi Arabia.
"The current re-routes will add some time to flights, but the actual disruption to traffic is minimal," Ian Petchenik of flight-tracking website Flightradar24 said. "However, given the congested nature of the airspace in the Gulf area, any escalation could include significant disruptions to civilian air traffic."
Airlines based in South-east and South Asia, such as Singapore Airlines and Thai Airways, are among those with frequent flights to Europe whose routes could potentially be affected by changes in air traffic patterns. Airlines based farther north in Asia – such as in Japan, Korea and northern China – also have significant numbers of flights to Europe, but given their geography would generally fly north of the area anyway. Potential impacts on specific airlines may be hard to gauge in the short term.
But following the latest crash in Iran, and with memories of the shooting down of Malaysia Airlines flight MH17 by a missile over Ukraine in 2014 – killing all 298 people on board – still fresh in the minds of pilots and their corporate bosses, most major airlines will likely consider re-routing their flights a price worth paying.