Joe Blogs effectively maps the domino effect of energy costs, illustrating how a single commodity shock can paralyze the entire global supply chain. It is a sobering look at the fragility of our interconnected economy where oil remains the ultimate systemic risk.
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Hi, welcome back to the channel. I recently reported on the fact that Spirit Airlines in the USA has effectively collapsed partly as a result of the huge rise in oil prices caused by the war in Iran and the ongoing disruption in the Strait of Hormuz. And unfortunately, the problems are now spreading throughout the entire global airline industry. And this is not just an airline story anymore. This is now becoming part of a global economic story because what we are seeing right now is a chain reaction that's impacting on airlines, tourism, hotels, restaurants, manufacturing, logistics, transport, and ultimately the cost of almost everything in the world. And the longer this situation continues, the worse the damage is likely to become. Now, before we get into all of the details today, could I ask anybody that hasn't subscribed yet to please hit that subscriber button? Really helps with the algorithm and also puts a smile on my face. So, what exactly is happening right now? Well, the core issue here is oil. The continued disruption around the Strait of Amuse combined with the ongoing military conflict has caused a massive spike in global oil prices.
We've had oil prices now above $90 per barrel for over 60 days. And over the past week or so, prices have been above $100. And in fact, they've been above $110 on many days. So why does this matter so much? Because oil is effectively the lifeblood of the global economy. Almost everything relies upon oil in some shape or form. Planes rely on jet fuel. Ships rely on bunker fuel.
Trucks rely on diesel. Factories rely on energy. Agriculture relies on fuel and fertilizers. Manufacturing relies on transport. So when oil prices surge sharply and remain elevated for a long period of time, it starts creating economic damage everywhere. And one of the very first industries to feel that pain is aviation. Because airlines operate on extremely thin profit margins. A lot of people assume airlines make huge amounts of money. In reality, many airlines only make a few% profit margin even during the good times. So, when fuel prices suddenly double, as they have recently, they were at $60 per barrel at the start of 2026, the economics can unravel very quickly. And that's exactly what happened with Spirit Airlines. Spirit had already been struggling financially. However, the expectation was that the company would eventually recover, but the sudden spike in jet fuel prices completely destroyed those recovery plans. Reports suggest that Spirit's business model had been based around jet fuel costs of around $220 per gallon, but prices surged to around $4.50 per gallon, and that completely changed the economics overnight. And the result, the collapse of one of America's best known lowcost airlines. But here's the important point. Spirit wasn't the crisis. Spirit was the warning flag because we're now seeing signs that stress is spreading throughout the global aviation industry and the numbers involved are becoming very serious. According to multiple reports, airlines globally have removed around 2 million seats from their schedules. That equates to around 13,000 canceled flights. And this is happening right at the start of the peak summer travel season in the northern hemisphere. Now, some of these cancellations are directly related to safety concerns around an airspace closures around the Middle East, but increasingly the issue is becoming economic. Flights are becoming far more expensive to operate. Airlines are having to fly longer routes to avoid dangerous airspace, and that means more fuel burn, longer flight times, fewer aircraft rotations, higher staffing costs, and rising maintenance expenses.
At the same time, insurance costs for airlines operating near conflict zones are also rising sharply. So costs are exploding from every direction simultaneously. And we're now seeing major airlines all around the world starting to cut services. Lufanza has reportedly cut around 20,000 short hall flights. Now that is incredibly significant because Lufanza is not some weak budget airline on the verge of collapse. This is one of Europe's strongest and largest airline groups. So if even Lufansza is being forced to reduce flights because of economic pressures, then that tells you how serious this situation has become. We're also seeing major disruption involving Turkish airlines. Turkey is particularly vulnerable because it depends heavily on tourism and international transit traffic and many of its routes pass close to Middle Eastern airspace.
Reports suggest Turkish Airlines has removed one of the largest numbers of seats globally during this crisis. Then we move across to the Gulf carriers.
Emirates, Etiad Airlines, and Fly Dubai have all had to suspend, reroute, or alter services because of the instability in the Middle East. And even when those flights continue operating, they're often having to take much longer routes. And again, that massively increases fuel consumption. Whizzer has suspended flights to multiple Middle Eastern destinations including Dubai, Abu Dhabi and Alman. We're also hearing reports involving SAS, Cath Pacific, Air New Zealand and many other international carriers. So this is clearly becoming a global issue rather than an isolated regional problem just in the Middle East. And this is where the wider economic concerns start to come into play because airlines cannot simply absorb these cost increases forever.
Eventually, those costs have to go somewhere and usually that means one of three things happen. Number one, ticket prices increase sharply. Number two, airlines reduce routes and cancel services. Or number three, airlines collapse. And in reality, we're probably going to see all three happening. Some airlines have already warned that ticket prices may need to rise between 5 and 10% immediately. But personally, I think the increases could be much larger if oil remains above $100 per barrel. And that creates another major problem because as ticket prices rise, simple economic tells us that demand will start falling. Families start cancelling holidays. Businesses cut travel budgets.
Consumers become more cautious. And that then creates the classic economic multiplier effect. Fewer flights means fewer tourists. Fewer tourists means lower hotel occupancy. Lower hotel occupancy means less revenue for restaurants, bars, attractions, and entertainment venues. That means lower profits, which then means cost cutting, which then means fewer jobs, reduced hours, and lower spending across the wider economy. And it doesn't stop there, because this oil shock impacts every business. Every company transporting goods around the world are seeing cost increases. Shipping costs rise, trucking costs rise, delivery costs rise, manufacturing costs rise.
Even supermarkets start getting hit because food transport becomes more expensive. Construction costs rise because materials cost more to move.
Retail costs rise because imported products become more expensive. And once businesses start seeing their costs rising sharply, they have two choices.
Either absorb those cost increases and make losses or pass the cost on to consumers, which then creates inflationary pressure throughout the entire economy. And this is why central banks and governments become so worried about prolonged oil shocks because they can trigger a vicious cycle. Higher energy prices create inflation.
Inflation reduces consumer p spending power. Reduced consumer spending power weakens economic growth. Weaker growth hits company profits. Falling profits lead to job cuts and business failures.
And that's why the longer this conflict continues, the greater the risk becomes to the global economy. Now, one of the most worrying aspects of all is that this aviation industry has only recently started recovering from COVID. Lots of airlines took an enormous amount of debt on during the pandemic. They had to to survive. Governments provided emergency support. Airlines borrowed heavily.
Balance sheets became stretched. And now just as the industry is finally starting to stabilize, it's being hit with another enormous external shock. So this is coming at a very dangerous time financially for many airline operators.
And unfortunately, if oil prices remain elevated throughout the summer period, I think there is a genuine risk that we could see more emergency route reductions, more government interventions, more fair increases, and potentially more airline failures because aviation is one of the industries most exposed to oil prices.
And at the moment, there is no quick solution. If the straight of a moose remains disrupted, global energy markets remain tight. If energy markets remain tight, oil prices remain high. And if oil prices remain high, the pressure on airlines and the wider global economy will continue intensifying. So this is definitely a situation that everybody should be watching very carefully because what initially looked like a regional geopolitical conflict involving the USA, Israel, and Iran is now increasingly becoming a major global economic problem. And the longer it goes on, the larger the knock-on consequences are likely to become. So, I'll keep you posted on any further news and developments as and when they happen.
But hopefully you enjoyed today's video.
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