Fuel accounts for a sizeable portion of an airlines’ day-to-day expenses, and a significant spike in jet fuel prices this year means that portion is growing larger. As the airline industry struggles to recover from the global travel downturn, rising jet fuel prices are becoming another major hurdle for airlines to deal with.
Jet fuel price rises 70% in 12 months
IATA’s jet fuel price monitor priced a barrel of jet fuel at US$102.90 at the close of trading on Friday, January 14. That reflects a 5.6% increase on the previous Friday’s closing price, an 18.7% rise over the last month, and a 70.1% increase over the past year.
Jet fuel is primarily derived from crude oil, with most crude oil coming from the United States, Saudi Arabia, Russia, Canada, and China. Jet fuel is made by blending and refining various crude oil petroleum distillation products such as naphtha, gasoline, or kerosene. Aircraft fuels account for around 6% of total global refinery fuel production.
OAG says the price rise over the last 12 months has added $48.9 billion to the fuel bills of airlines worldwide. IATA estimates airlines will take another $61.5 billion hit to their fuel bills this year.
No jet fuel price reprieve on the horizon
Driving the jet fuel rise price are crude oil prices reaching near seven-year highs. Oil prices are sensitive not only to actual supply issues but geopolitical concerns that threaten supply issues. Yemeni Houthi attacks on oil facilities in the UAE and Russian military threats in eastern Europe that could disrupt flows along the vital Nord Stream 2 gas pipeline have contributed to the most recent oil price spikes.
Organization of the Petroleum Exporting Countries (OPEC) officials believe the crude oil price is unlikely to drop significantly anytime soon.
“There is an expectation the 2022 prices will be around the (high) 2018 levels,” Midas Aviation’s John Grant told a recent OAG webinar. He notes most airlines enjoyed an extremely profitable year in 2018. However, the flying conditions have changed markedly.
“The high yield, last-minute booking traveler is not there. Demand generally is suppressed, we’re not driving productivity on aircraft like we used to, and utilization is down in most fleets.
“Some airlines will be able to buy forward and hedge, but for many of them, the fuel price will be too high to make a profit – and we know that the margin and returns on investment are really low in this industry.”
Hedging helps ease the jet fuel price pain
Most airlines buy fuel in advance via the hedging process. Hedging involves paying for future fuel deliveries today at a (hopefully) lower price than the spot price payable on the delivery date.
Airlines that bought jet fuel in May 2020, when the price was as low as $29 per barrel, would have reaped big savings benefits as jet fuel prices have tracked skywards since. By January 2021, the price was around $60 per barrel and hasn’t looked back.
In the 12 months to December 31, 2020, United Airlines spent $5.75 billion on jet fuel. In the last three months of the year, the airline was paying approximately $2.41 per gallon. This quarter, United expects to pay about $2.51 per gallon. There are 42 gallons in a barrel of jet fuel.
Volatile jet fuel prices are part and parcel of running an airline. Most commercial airlines have in-house experts who target price points to buy jet fuel at and when not to. But even in the current environment, rising jet fuel prices can be a preferable alternative to other problems that plague the airline industry.
Rising jet fuel prices are part of a tough operating environment that includes declining passenger demand that airline bosses now have to deal with. It suggests that after a tough couple of years, running an airline may not get much easier in 2022.
Source: https://simpleflying.com/jet-fuel-price-rises-airline-industry/
