The threat to summer holidays looming from jet fuel shortages

Step on to the tarmac at any major airport around the world, and you'll notice an unmistakable smell. A slightly sweet, oily scent, redolent of old workshops or antique paraffin lamps. It is as much part of the travelling experience as lukewarm coffee and queues at passport control. It is, of course, the pervasive smell of jet fuel.

That pungent aroma has become a lot more expensive in recent weeks. The price of jet fuel has risen dramatically on international markets since the start of the conflict in the Middle East. There are now concerns that unless the Strait of Hormuz reopens soon, there could be physical shortages in some areas in the coming months.

Many airlines have already pushed up ticket prices as the cost of flying has increased, and some have trimmed their capacity. Unless extra supplies can be found, a lack of fuel could lead to further disruption and cancellations heading into the peak summer holiday period.

The crisis has exposed just how vulnerable the industry in the UK - Europe's biggest consumer of jet fuel - is to disruption in the Middle East. So what impact might that have on our summer holidays - and what could be done about it?

The Gulf region produces far more jet fuel than it requires for its own purposes. As a result, under normal circumstances it is a major exporter, accounting for about 20% of the fuel traded on international markets each day. Europe as a whole is a key buyer of that fuel. Due to a lack of refining capacity, it is heavily reliant on imports, more than half of which typically come from the Gulf.

With the Strait of Hormuz having been blocked for the past eight weeks, however, those supplies have not been available, prompting a scramble for fuel produced elsewhere. This has pushed up prices dramatically.

In late February, before the first US and Israeli airstrikes, jet fuel was trading at $831 per tonne in Europe. By early April, it had touched $1838 – an increase of more than 120%. It has since retreated but has consistently remained above $1500.

Jet fuel is essentially a highly refined form of kerosene with specialised additives, and is usually produced from fractional distillation of crude oil.

Because supplies are dictated largely by the availability of refining capacity, the loss of output from the Gulf has led to jet fuel prices increasing far more than those for crude oil.

"We have had five refinery closures in the last two-and a-bit years in Europe, whereas jet fuel demand has been rising year on year," explains Amaar Khan, head of jet fuel pricing at Argus Media. "So, we see weaker supply, greater demand."

The UK is particularly dependent on imports, which make up 65% of what we need. Two of the refineries that closed were British, leaving just four in operation here.

For airlines, fuel is a major expense. It typically accounts for 25-30% of their operating costs, according to the International Air Transport Association (IATA). As a result, if the price goes up, it can have a major impact on their profitability.

In Europe and Asia, it is common for airlines to use hedging strategies to limit their exposure to rising prices, buying fuel or other oil products at a fixed or capped cost in advance.

However, this does not offer complete protection. EasyJet, for example, hedged 80% of its fuel supply for the first half of the year at $717/tonne - but finding the remainder at prevailing prices cost the airline £25m in March alone.

Other carriers, notably US ones, have preferred not to hedge at all in recent years, because it can prove expensive when prices fall. That has left them heavily exposed to the current crisis.

Some airlines - such as Air France KLM, Air Canada and SAS - have already responded by cutting their summer schedules. The German group Lufthansa said earlier this month it would remove 20,000 flights between now and the end of October.

"If a route was marginally profitable before this crisis came along, it is now firmly under water and losing money in a big way," says Jonathan Hinkles, a former chief executive of the regional carrier Loganair and current CEO of Skybus.

Fares have also been going up. This has been most marked on long-haul routes – especially those normally served by the major Gulf carriers, where a steep reduction in capacity has combined with high fuel prices to make tickets a lot more expensive. A flight from London to Melbourne in June now costs 76% more than it did last year, for example, according to research from the consultancy Teneo.

The US carrier United Airlines has been particularly bullish about making sure passengers bear the brunt of higher fuel costs, with its CEO Scott Kirby telling investors earlier this month the company would do "whatever it takes to recover 100% of the increase in jet fuel prices as quickly as possible".

IAG, which owns British Airways as well as Iberia, Aer Lingus, Vueling and Level, has also warned that travellers will have to pay more, while Virgin Atlantic has already introduced surcharges ranging from £50 on a return economy class ticket to £360 for a business class fare.

On short-haul services within Europe, however, the impact on fares has been a lot more muted so far. In fact, according to Wizz Air's chief executive József Váradi, prices have been going down as airlines have sought to persuade potentially reluctant customers to travel.

"Simply, people don't know what's going to happen… so there is a level of hesitancy," he told reporters in late April. "But to be honest, that level of hesitancy can be overcome through price stimulation. So, short term, you are actually seeing prices dropping."

According to John Strickland of JLS Consulting, the price spike gives well-hedged low-cost carriers an advantage over rivals who have not bought so much fuel in advance.

"They will look to put pressure on other people who are not in such a healthy position," he says.

But although fuel prices have clearly been the leading preoccupation for airlines since the start of the conflict in Iran, there is another looming concern that particularly affects Europe: the risk that supplies could actually run short.

In mid-April, the head of the International Energy Agency (IEA), which advises 32 member governments on energy supply and security, warned that Europe had "maybe six weeks of jet fuel left".

A detailed analysis from the IEA noted that while imports from the US in particular had picked up, the extra fuel coming across the Atlantic so far was only likely to replace a little over half of the lost Middle Eastern supplies.

If that trend continued, it warned, reserves would reach critical levels by June. This would mean "physical shortages may emerge at select airports, resulting in flight cancellations and demand destruction".