Oil crisis: How travel managers can tackle soaring ticket prices and compromised air agreements

When the USA and Israel attacked Iran on 28 February, travel managers’ immediate priority was to repatriate stranded and endangered travellers in the Middle East. Now the focus is firmly on economics. With Iran blockaded and – despite recent signals of possible resolution – the strait of Hormuz closed, one-fifth of the world’s oil shipments are frozen. Longer term, production facilities on both sides of the Gulf are damaged. 

Consequently, the price of jet fuel has doubled since hostilities began and concerns are intensifying that supplies will dry up. The crisis leaves travel managers combating double-digit air ticket price increases that look set to stay. “Even once the conflict is over, we would not expect prices to fall back immediately,” warns James Austin, director of organisation development for UK-based TMC Access Bookings.  

It also leaves corporate airline contracts in need of urgent review following abrupt changes both to airlines’ schedules and customers’ demand. Buyers may have less volume to meet commitments on certain routes, while in return suppliers have less capacity to offer.

Buyers must “reach out to suppliers to engage a discussion on the contract terms,” says Olivier Benoit, managing director and senior vice president for Advito, the consultancy wing of BCD Travel. “What's important is not to wait for the situation to clear up but to assess the impact today that could trigger renegotiation.”  

Here is how buyers, consultants and travel management companies see price, supply and demand dynamics playing out, and what they recommend as next steps to prevent air spend from spiralling out of control.

Price – likely to rise even higher

Air fares had already been climbing over the winter, a UK-based global travel manager tells BTN, speaking on condition of anonymity. Since hostilities erupted in the Gulf, he has seen fuel surcharges of up to $800 imposed on long-haul business class, compounded by additional base fare and ancillary fee (such as bag charge) increases to produce total ticket price rises of up to 15 per cent.

Dutch multinational lighting corporation Signify was also confronting higher air costs before the conflict started, partly because of the trend for carriers to remove their lowest fare classes from the global distribution systems through which its tickets are booked. 

Now the Iran war has imposed additional hidden costs as well as the obvious ones. On the meetings front, says Ewa Doromoniec Vieira, global category lead for travel, expense and events, the outbreak of conflict led to “more no-shows and late cancellations, which resulted in charges that could not be avoided even though it wasn’t our fault.” 

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Meanwhile, longer flights caused by airline re-routings have undermined the company’s business class policy. “We allow business class over six hours,” Doromoniec Vieira says. “Many colleagues are cost-conscious and if it's a day flight, they may take premium economy or even economy if it's eight or 10 hours, but flights are becoming longer and longer, meaning that business class is almost essential.”

Nor do buyers have any idea how much more pricing pain to brace for on top of what they have already endured “It can take many months for pricing to stabilise,” says Access Bookings’ Austin. In this particular case, we anticipate fares remaining elevated for up to 12 months after the crisis ends, as airlines work to restore capacity and balance supply with demand.” 

Aurélie Duprez, founding partner of Areka Consulting, expects airlines to keep pushing up fares as their costs continue to rise. In addition to higher unit prices for fuel, “there are other factors like new crew safety protocols and, most of all, the detours that they have to take of up to three hours, because they cannot fly over certain areas, leading to additional fuel burn. Before the crisis, we were forecasting 2 to 4 per cent air fare inflation in 2026. Now we are more thinking more about 5 to 10 per cent,” Duprez says.

Supply – thinner routes bear the brunt

The new economics of jet fuel at as much as $200 per barrel has forced worldwide capacity cuts, the elimination of 20,000 summer schedule flights by Lufthansa being just one example. To date, said Benoit, airlines have reduced schedules to save fuel costs, but additional cuts forced by fuel scarcity are a real possibility.

The reductions are “directly affecting corporate clients when airlines cut secondary or tertiary routes operated with older, less fuel-efficient aircraft,” Benoit continues. “The impact will be very specific to each programme. If your travel footprint is served by multiple secondary and tertiary routes, you may experience a larger impact.”

On the other side of the balance sheet, says Areka’s Duprez, pulled services to the Middle East mean airlines “have aircraft they can use on other routes that are more profitable, the high yield routes from Europe to Asia for instance. We could see slightly more availability and capacity on those routes.” Benoit disagrees, citing airport slot constraints.

Demand – Gulf carriers bleed market share

The purchasing picture is being shaped not only by where business travellers can fly but where their companies want them to fly. “Geopolitics changes on an hourly basis these days,” observes the UK-based travel manager, but at time of writing, his company is blocking flights to and through the United Arab Emirates, Qatar and Israel, though not Saudi Arabia. 

Benoit says “a lot of corporations have restricted travel to or through the Middle East” but that most Advito clients are high-spending BTN Top 100 members primarily with direct-flight policies. In contrast, the big three Gulf carriers – Emirates, Etihad and Qatar – are used heavily by Areka clients. Since the conflict began, this trio “have lost 20 per cent share with our clients,” says Duprez. “Other carriers are getting those shares. The biggest winners are Lufthansa (plus 5 points), Turkish (plus 3), Air India (plus 2) and Singapore Airlines (plus 2).”

For flights to Asia and Australasia, Access Bookings also reports a shift to Singapore as an alternative hub, as well as Hong Kong, Tokyo and Helsinki.

The complex supply and demand picture makes pricing equally complex. Sitting alongside actual increases in base fares and surcharges, higher load factors on services that have gained share, and lower loads on services that have lost share, are making yield management more volatile as lower fare buckets close faster or remain open longer accordingly. The UK-based travel manager, for example, has seen one Gulf carrier raise base fares 7 per cent. Yet business class prices for London-India are as low as UK£2700 return for travellers prepared to fly via the Gulf, whereas non-stop ticket prices to India have risen sharply.

What travel managers can do

Travel managers’ first step, according to Duprez, should be to ensure their data does not comprise the base fare alone. Understanding total ticket price and all its components is essential. That is particularly important because, says the UK travel manager, “a few years ago we were complaining about the carrier imposed surcharge being 15 per cent. Now it’s 40 per cent.”

Notoriously, airlines refuse to include surcharges in their corporate fare negotiations, but “if the fuel surcharge increase has been 20 per cent and the jet fuel price evolution is 10 per cent, then definitely a discussion can happen,” says Duprez. “The airline is probably not going to write a cheque, but you can use that as a lever to negotiate potentially improved discounts or soft benefits.”

The travel manager has done exactly that. “One airline made us an offer in February but I have said ‘you guys need to up our discount by five per cent because the surcharge is bonkers,” he says.

When it comes to managing deals on the point of expiring, Duprez urges a case-by-case approach. “I advise extending with some, renegotiating with some, and ideally deferring for a few months if that's an option,” she says. “There are certainly carriers where it does not make much sense to renegotiate right now, typically the Middle East carriers. However, on others like KLM, Lufthansa, Turkish and a few APAC carriers such as Air India, Singapore and Cathay Pacific, it does make sense because they're potentially going to get additional business.

“It's also very important to protect existing agreements with Qatar, Emirates and Etihad, because they are likely to be needed at some point,” she added. “The shift to alternative carriers might be temporary, although it's never good for the Middle East carriers if this lasts, because when travellers discover that flying Lufthansa is not too bad or Air India, with its new aircraft, is not what they imagine, then will they get those travellers back when the crisis is over?” 

Meanwhile, a time of steep fare rises is a time for travel managers to reappraise their demand management. “There are always three levers to lower air costs,” says the UK travel manager. “The third is negotiation, but number one is don’t fly, because you always get a 100 per cent discount. Number two is behave better,” examples of which, he adds, include booking well in advance, buying non-refundable tickets where appropriate and flying on off-peak days. 

Given the severe economic challenges airlines face, Doromoniec Vieira believes her potential to negotiate larger discounts is limited, “which is why I would rather look at internal processes and reduction of flights, which we were doing anyway. Client relationships are important, but maybe we can say hello to them virtually once a month and in person just once a year.”