The air cargo industry is facing a significant challenge in managing its largest single expense: fuel. Fuel costs represent a substantial portion of total operating expenses for cargo carriers, and with rising fuel price volatility, driven by increasing global uncertainty, controlling these costs is becoming more challenging. Jet fuel can rise to as much as 35 percent to 50 percent of an air cargo company’s operating costs. For cargo carriers in a low-margin industry, tackling this issue is key to long-term financial sustainability.

Unique challenges

Unlike passenger airlines, cargo carriers operate under a different set of financial constraints. Because passenger airlines face costs such as cabin crew and frequent flight schedules, fuel represents a smaller proportion of overall expenses – typically, 20 percent – 35 percent of operating costs. In addition, passenger planes usually fly lighter and more frequently, making them more fuel-efficient and allowing them to benefit from economies of scale – advantages that cargo carriers don’t have.

For cargo carriers fuel is therefore, a much greater proportional expense, and managing fuel costs critical for the survival of cargo airlines.

Price volatility

One of the most pressing concerns for cargo airlines is the unpredictable volatility of fuel prices, which is largely driven by: fluctuations in crude oil prices, geopolitical instability, and constraints within the refining market. In recent years, the ongoing Ukraine war, global supply chain disruption, and refining capacity limitations have all contributed to price spikes.

Covid-19, as well as market shifts such as the OPEC price war, have exposed the air cargo sector to even more erratic fuel price movements. Fuel price volatility has become more frequent, complicating financial planning and pricing strategies.

Another challenge the industry faces is compliance with evolving sustainability regulations. Carbon pricing schemes such as the EU Emissions Trading System (EU ETS), add a layer of complexity, and Sustainable Aviation Fuel (SAF) mandates, further drive fuel expenses. While SAF holds promise for reducing the carbon footprint of aviation, it comes at a significantly higher cost compared to conventional jet fuel.

Currency fluctuations are another issue for carriers operating in regions with weaker currencies, as jet fuel is quoted in USD. This means that for these carriers, fuel becomes an even larger proportion of total expenses. Without a strategy to manage these rising and volatile fuel expenses, many carriers will struggle to remain competitive, and it may threaten their long-term viability.

Cost strategies

In response to these challenges, cargo carriers turn to a variety of strategies to mitigate the impact of fuel price volatility. One such approach is hedging with derivatives. Hedging can stabilise fuel costs but carries risks if prices move unfavourably. What’s more, derivatives hedging is a complicated task which demands substantial financial expertise.

Improving operational efficiency is another avenue. Cargo carriers are increasingly investing in weight-reduction measures, such as lighter materials and more streamlined aircraft, to lower fuel consumption.

Optimising flight routes to minimise unnecessary fuel burn is a key strategy for managing costs. However, this becomes increasingly challenging in the face of geopolitical disruptions, such as Russia’s ban on Western carriers from its airspace, which force airlines to take longer, less efficient routes.

Additionally, the renewal of fleets with next-generation aircraft designed for better fuel efficiency plays a crucial role in long-term cost savings – but demands significant upfront investment.

Risk management is key

The growing difficultly of managing fuel costs underscores why addressing fuel price risk should be a top priority for cargo airlines.

While fuel efficiency requires investment, risk management offers a more immediate solution. One means of doing this which avoids the downsides of derivatives hedging, is energy price risk insurance, which needs far less upfront investment and protects balance sheets by insuring against swings in the fuel price.

By hedging fuel costs and strategically navigating market risks, cargo carriers can better control the financial impact of fuel price volatility. Ultimately, integrating robust risk management strategies with a focus on fuel efficiency will help cargo airlines weather the storm of rising costs, ensuring their long-term success in a highly competitive industry.

Conclusion

The challenges of rising fuel costs and price volatility are nothing new for the airline cargo industry, but they are becoming increasingly difficult to navigate. As fuel comprises a significant portion of operating expenses, cargo carriers must take proactive steps to mitigate these costs. By combining operational improvements, and fleet renewal, the industry can better cope with financial pressures. However, the critical role of fuel price risk management cannot be overstated – it is the key to safeguarding the financial stability and future viability of cargo carriers.