Not all jet fuel price shocks are made equal, researchers say

With Australia importing about 90 per cent of its jet fuel, which typically accounts for 25 to 40 per cent of an airline’s operating costs, understanding how airfares respond to fuel price shocks is “particularly important”, researchers said.

Both Qantas and Virgin have increased airfares due to higher fuel costs after Iran effectively closed the Strait of Hormuz, which sees around 20 per cent of global oil traffic, earlier this year. The major carriers have also cut capacity on domestic services.

“Not all fuel price shocks are economically harmful in the same way. The source of the shock matters greatly,” said Professor of Aviation Shane Zhang from Adelaide University’s College of Engineering and Information Technology.

“At first glance, it may seem that fuel price increases can be easily passed on to consumers through higher fares. In reality, the relationship is more complex.

“Airfare adjustments are shaped not only by rising input costs, but also by airline pricing strategies, passenger behaviour, competitive pressures and consumer sensitivity to price.”

The study divided fuel shocks into three categories – supply shocks, aggregate demand shocks and jet fuel-specific demand shocks – based on data from BITRE.

VIEW ALL

>

According to Dr Yifei Cai from Adelaide University’s College of Engineering and Information Technology, “one of the more surprising findings” was that fuel supply shocks – caused by events like war, natural disaster, or disrupted supply chains – have little direct impact on domestic fares.

“Many people would expect airlines to immediately pass fuel cost increases on to passengers, but our results suggest airlines can often smooth these effects through fuel hedging, long-term supply contracts and other operational strategies,” said Dr Cai.

The second category – aggregate demand shocks – usually occur during periods of economic growth, and can cause an increase in restricted economy and business fares, as demand tends to increase during these conditions, especially among business travellers.

Finally, jet fuel-specific demand shocks occur “when market participants begin buying or hoarding oil because of fears about future shortages, geopolitical risks or climate-related disruption”.

According to the researchers, this can reduce business class fares in the short term as corporate travel budgets shrink, but drive up discount fares as more people seek cheaper tickets.

“Oil-specific demand shocks are particularly destabilising because they can trigger sharp price increases without corresponding changes in actual supply or global demand,” said Dr Cai.

“Overall, the findings highlight that airfare responses are shaped not only by fuel costs, but also by passenger behaviour and broader macroeconomic conditions.”

Professor Zhang noted that fuel market disruption caused by the current situation in the Middle East “can act in more than one way”.

“On one hand, it can be understood as a supply shock, where the physical flow of oil or refined products is constrained. Our research suggests these supply shocks do not necessarily lead to immediate domestic airfare increases, because airlines may be able to absorb them,” he said.

“At the same time, uncertainty can create an oil-specific demand shock, where buyers respond to fears of future shortages. That can be more destabilising for aviation markets and may lead to very different fare responses across domestic and international routes.”

The Federal Government in this year’s budget earmarked $3.2 billion to establish a government-owned Australian Fuel Security Reserve of around a billion litres, to bolster long-term supply and storage of jet fuel and diesel.