A JetBlue Airways aircraft taxi alongside American Airlines, Delta Air Lines, and Alaska Airlines aircraft at Reagan National Airport (DCA) in Arlington, Virginia on Monday, April 6, 2020.
Andrew Harrer | Bloomberg | Getty Images
The oil rally is taking jet fuel, which is another headache for airlines, still suffering from depressed demand for travel amid the pandemic.
US jet fuel prices hit a nearly 13-month high of $ 1.67 a gallon on Wednesday. This comes from data from S&P Global Platts, a surge spearheaded by an Arctic explosion and winter storms that disrupted oil production, refining and transportation. Millions have been left in the dark and in the dark in Texas, which largely relies on natural gas for heat and electricity.
“We expected fuel to be at this level in the second half of the year,” said Savanthi Syth, airline analyst for Raymond James. More expensive fuel can make it more difficult for airlines to contain their money consumption, a goal that has already been delayed due to weaker than expected demand.
Cost headwind
Scott Haralson, CFO of Spirit Airlines, cited higher fuel costs as one of the discount airline’s challenges in the first quarter during a February 11 earnings call. The airline expects fuel costs to increase 32% this quarter from the last three months of 2020. Greg Anderson, CFO of Allegiant Air parent Allegiant Travel Co., cited higher fuel bills as headwinds during a quarterly call on Feb. 3.
Jet fuel production, along with work, is one of the airlines’ biggest expenses. Fortunately for airlines, labor costs are currently backed by billions in federal aid, which helps to mitigate the blow of more expensive fuels, Syth said.
Jet fuel consumption has declined over the past year as airlines have greatly reduced flying amid declining demand for air travel. This led to a significant drop in prices as well as the share of fuel costs on airlines’ balance sheets. American Airlines, which discontinued fuel hedging in 2014 when oil prices got crater, said in a security filing this week that its $ 3.4 billion fuel bill was only 12% of the cost last year, after a 22% share in 2019 when the price fell and its consumption roughly halved.
“Based on our projected home and regional fuel consumption for 2021, we estimate that increasing the price of aviation fuel by a cent per gallon would increase our annual fuel costs by $ 38 million for 2021,” the company said in the annual filing.
Demand is recovering
According to a Citi report this week, jet fuel consumption in the US this year is nearly a third lower than last year so far.
The supply disruption was enough to drive prices higher, but for prices to keep rising, demand for travel must also recover, said Lenny Rodriguez, an analyst at S&P Global Platts. The Transportation Security Administration’s daily airport checks averaged more than 810,000 per day this month, compared to 2.1 million for the same period last year.
This weak demand makes refining jet fuel less attractive compared to other oil products.
“This is the laggard for all oil products,” said Rodriguez.