The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Oliver Taslic

LONDON, April 13 (Reuters Breakingviews) - Airlines have a jet fuel problem. With refineries in the Gulf unable to shift their product through the Strait of Hormuz, prices in the key northwest of the continent have almost doubled since late February to around $1,600 a metric ton. If that wasn’t bad enough for an industry that generally operates with slim margins, carriers like Finnair and $32 billion Ryanair RYA.I have flagged another risk ahead of the busy summer season: fuel shortages. Weathering the storm may require government help.

Though individual airports and regions have run low on fuel before due to supply chain issues, systemic shortages are exceptionally rare. One historical parallel could be the 1973-74 oil shock, when crude prices more than tripled after Arab nations sharply cut back on output. In the UK, the government directed airlines to reduce fuel consumption while granting exemptions for essential services like air ambulances. But that was easier to implement in an era when major carriers were owned and controlled by states.

Airline trade association IATA says between 25% and 30% of Europe’s jet fuel demand originates from the Gulf, and that the continent has commercial inventories that typically amount to just over one month of demand. That gives carriers in today’s privatised industry room to start with familiar market-based solutions. For instance, there will probably be some degree of demand destruction brought about by higher fares, with Air France-KLM AIRF.PA and SAS already hiking prices in response to soaring costs. Airlines could also pay up for alternative supplies from the U.S. or Nigeria – even if these are unlikely to fully offset Gulf flows. Another sensible idea is to cut some less profitable routes. As Ed Bastian, CEO of U.S. giant Delta DAL.N, commented last week: “The best type of fuel recapture is not to purchase the fuel in the first place if it’s not going to be profitable”.

Even so, Ryanair CEO Michael O’Leary earlier this month raised the possibility of a risk to 10% to 20% of fuel supplies from June onwards if the conflict continued to the end of April. Although individual airports and regions will be better or worse off based on factors such as the presence of local refineries or the ability of their client airlines to secure alternative supplies, those could be useful numbers to start with.

A hypothetical central planner approach, then, could be for all of Europe’s airlines to meet and agree to reduce their capacity by 10% to 20%, perhaps using their respective market shares last year as a starting point. But this may be too blunt a tool. It penalises carriers that are growing rapidly or can afford to splash the cash on alternative supplies. It also falls foul of competition rules, as well as regulations that govern airlines’ all-important “slots” – the permission to take off or land at a congested airport at a specific time, which generally operate on a “use it or lose it” basis.

This is where governments could step in. In a period of fuel shortages, short-haul hops between major European cities like London, Paris, Brussels and Amsterdam, which have plenty of train connections, look ripe for cutting. But the likes of Air France, British Airways and KLM may be reluctant to do so, given these passengers often “feed” onward long-haul travel and cancellations would put precious slots at airports like Heathrow or Charles de Gaulle at risk. A temporary waiver on losing slots, as seen during the pandemic, could make that decision easier, though.

Likewise, despite a plethora of options on popular routes between, say, the UK and Spain, a single airline is unlikely to want to cut first and risk losing market share. But if fuel shortages really bite, some flexibility from authorities for carriers to jointly reduce capacity could lower fuel consumption while still maintaining connectivity. Finally, states can partly control the supply of crude oil – and in some cases jet fuel itself – through reserve releases.

Given tourism contributes around 10% of the European Union’s GDP – and more in countries like Spain and Greece – it’s in Europe’s interest not to have a disorderly supply crunch, with flights being called off en masse and at short notice. That interest shouldn’t extend to cash-strapped governments using state funds to pay up for what pricey jet fuel there is just so people can go on vacation. But time-limited holidays of a regulatory nature are well worth considering.

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CONTEXT NEWS

Oil prices climbed above $100 a barrel on April 13 as the U.S. Navy prepared to block ships ‌to and from Iran via the Strait of Hormuz, a move that could restrict Iranian oil exports, after Washington and Tehran failed to reach a deal to end the war.

Shares in European airline and travel companies like easyJet, Deutsche Lufthansa and Tui fell around 4% in early trading.

Europe’s airport industry group has warned that the continent could face a systemic jet fuel shortage ​in three weeks unless the Strait of Hormuz opens up, Reuters reported on April 10 citing a letter to the European Commission from Airports Council International Europe.

The group called for urgent ‌EU-wide action to secure supplies ahead of the peak summer travel season, and said a fuel crunch would “significantly harm ​the European economy”, according to the Reuters report.