• The price of oil and the value of the US dollar are often inversely related.
• However, the correlation has broken down in recent months.
• The combination of a strong US currency and high oil costs is putting strain on airlines’ recovery.

The rare combination of a strong US currency and high oil costs is putting strain on global airlines’ recovery at a time when broad inflationary pressures and manpower shortages are also putting pressure on the pandemic-hit industry’s recovery.

The price of oil and the value of the US dollar are often inversely related, so when one is high, the other is low, helping to balance the financial impact on airlines that operate in other currencies.

However, the correlation has broken down in recent months, with the war in Ukraine generating a spike in oil prices at a time when the US is a net oil exporter and the US dollar benefiting from interest rate hikes aimed at containing inflation.

Airlines gathered in Doha this week for the International Air Transport Association’s annual convention expressed concern about the rising oil price and the dollar.

“It’s not good for airlines at all.” Tony Webber, a former chief economist at Qantas Airways in Australia, described the situation as “the perfect storm.”

The benchmark Brent oil price is around $115 a barrel, and the US trade-weighted real exchange rate index, which was developed in 2006, is at an all-time high.

Non-US airlines are exposed to the dollar in the form of oil prices, aircraft purchase and lease fees, maintenance costs, and occasionally debt, all of which rise in their local currency when the dollar rises.

The strong US dollar, which is trading at its highest level versus the won in more than a decade, is “painful,” according to Korean Air Lines Co Ltd (003490.KS) Chief Executive Walter Cho.

“We owe a lot of money in US dollars, and we have to pay interest on it.” “Interest is modest, but with current currency rate, it could as well be 10%,” he stated on the sidelines of a Doha aviation conference.

The cost increase for most non-US airlines substantially outweighs the benefit of ticket sales to US-based consumers shifting to more local currencies.

SpiceJet, an Indian low-cost carrier, warned last week that rising fuel prices and the loss of the rupee will force it to raise fares by 10% to 15%. find out more

Fuel had previously accounted for 20% of Malaysia Airlines’ costs, but that had jumped to 45 percent due to the weakening ringgit, according to Izham Ismail, the company’s CEO.

According to Webber, most US airlines are unhedged and favour a lower dollar since they profit from a greater conversion rate when selling tickets in euros and other currencies to international customers.

Hawaiian Airlines Chief Executive Peter Ingram said the airline was watching the yen , trading at 20-year-lows, as it ramped up flights to Japan, traditionally the biggest foreign

“It’s not a binding constraint on demand at this moment,” he said of the yen, “but it’s something we’re absolutely conscious of because the vast majority of traffic on our flights, plus or minus 90%, is Japanese originating business.” “As a result, the exchange rate will raise the expense of travelling to the United States.”

According to statistics from aviation consultancy IBA, airline failures have traditionally increased when an index that combines the oil price and the strength of the US dollar is high.

In a webinar last month, IBA Chief Economist Stuart Hatcher stated that significant pent-up demand has resulted in few failures this year, but that this could change after the peak summer season is past.