The international nature of the aviation industry means that airlines are exposed to currency fluctuation risk. Most carriers incur both costs and revenues in a number of currencies, and the fact that some of these cash flows require conversion into a different currency forms the basis of an airline’s foreign exchange (FX) risk. In ‘normal’ times, annual changes in exchange rates are typically relatively small, and can be either mitigated or largely absorbed by carriers. Strong appreciation of the US dollar over the past year or so has been felt more widely; indeed, as a result, many airlines’ USD-denominated costs have risen by 10-15% on average in local currency terms. Vietnam Airlines started 2023 with a report that the airline lost VND10.09tn ($430mn) in 2022, blaming rising fuel prices and foreign exchange volatility. The airline reported that overall expenses were 3.6 times higher than the same period in 2021. Last year saw Vietnam Airlines reach 70% of pre-pandemic revenues compared to 2019. The airline’s balance sheet states that Vietnam Airlines’ short-term liquidity pressure is growing. Concluding 2022, the national airline held VND12.3bn ($5.2mn) in short-term assets, including VND3,400bn ($1.45mn) in cash liquidity. Short-term debt totalled VND53,000bn ($2.26bn), including short-term financial lease debt at VND17,600bn ($750mn). Changes in exchange rates can also influence airline supply decisions. In the airline industry, capacity in the short run is essentially fixed. Airlines may be able to respond to relative price shifts (and the associated consumer demand response) at the margin by changing the gauge of aircraft on a particular route or via strategic cancellations, for example, but these actions will not fundamentally change supply. Instead, an airline is more likely to adjust its pricing schedules, rather than capacity, to rebalance supply and demand. In the longer-term, a permanent (and significant) shift in exchange rates may be a relevant consideration to network planning or aircraft investment decisions. However, this effect is likely to be easily outweighed by more fundamental considerations including the expected level of future demand and corporate strategy decisions. Exchange rates would typically be considered in the context of a sensitivity analysis rather than being a primary driver. Just three weeks ago, thousands of airline passengers were stranded across Papua New Guinea as commercial airlines grounded planes after the country’s sole supplier of finished petroleum products stopped providing jet fuel. Puma Energy, the country’s only fuel supplier, said the shortage in supply was due to a lack of foreign currency from the Central Bank of Papua New Guinea, used to buy fuel on the international markets. There was chaos at the country’s main domestic airport in Port Moresby, after all major airlines cancelled their scheduled domestic flights. Hundreds of passengers were turned away from Jacksons International Airport in the capital city, prompting passengers to demand an intervention from Prime Minister James Marape. “Our livelihood is being affected, just after new year,” said Simdei Kamgu, who was supposed to be travelling to Kiunga, Western Province. The prime minister, James Marape, described the situation had become a national security issue and asked the Bank of PNG and Puma Energy to solve the problem, saying the country was being held to ransom. Papua New Guinea’s largest airline, Air Niugini, released a statement saying that all flights around the country would be cancelled because Puma Energy had suspended the supply of Jet A1 fuel to all airline companies. “We have done everything possible to ensure that this situation did not occur and that we could continue to support the people of Papua New Guinea especially as they return from their Christmas holiday,” said Air Niugini. “The airline can assure all our customers that we are completely up to date with our payments to Puma Energy.” Air Niugini warned that international flights could also be cancelled if the country’s central bank failed to supply enough US dollars for the fuel supplier, Puma Energy, to buy jet fuel. A dispute between the Bank of Papua New Guinea and Puma Energy has affected the ability of the energy company to buy fuel.
The author is an aviation analyst. Twitter handle: @AlexInAir
