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 and causing another headache for airlines, which are still suffering from depressed demand for travel amid the Covid pandemic.
According to data from S&P Global Platts, US jet fuel prices hit a nearly 13-month high of $ 1.67 a gallon on Wednesday. This surge was led 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 Raymond James. More expensive fuel can make it more difficult for airlines to curb their cash use, a goal that has already been delayed due to weaker than expected demand.
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., also cited higher fuel bills as a headwind during a quarterly call on Feb.3.
Jet fuel production, along with work, is one of the airlines’ biggest expenses. Fortunately for the 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 has lowered prices significantly and lowered airlines’ fuel costs. American Airlines, which discontinued fuel hedging in 2014 when oil prices got crater, said in a securities filing this week that its $ 3.4 billion fuel bill was only 12% of the cost last year, compared to 22% 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 bills by $ 38 million for 2021,” the company said in the annual filing.
Demand is recovering
According to a Citi report earlier 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 demand for travel must also recover in order to keep prices up, 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.