A JetBlue Airways plane taxis near 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 surge in oil is taking aviation fuel with it, representing another headache for airlines that are still struggling with falling travel demand in the Covid pandemic.
U.S. aviation fuel prices reached an almost 13-month high of $ 1.67 a gallon on Wednesday, according to data from S&P Global Platts, a climb led by an arctic explosion and winter storms that halted oil production, refining and transportation. Millions have been left in the cold and the dark in Texas, which largely depends on natural gas for heating and energy.
“We expected fuel to reach these levels in the second half of the year,” said Savanthi Syth, an analyst at airline Raymond James. More expensive fuels can make it harder for airlines to curb money consumption, a goal that has already been delayed due to weaker than expected demand.
Headwind cost
Spirit Airlines CFO Scott Haralson, during a February 11 earnings conference call, cited higher fuel costs as one of the airline’s first quarter discount challenges. The carrier expects fuel costs to increase 32% this quarter from the last three months of 2020. Greg Anderson, CFO of Allegiant Air, parent of Allegiant Travel Co., also cited higher fuel costs as an obstacle during a 3 February quarterly call.
The production of aviation fuel is one of the biggest expenses for airlines, along with labor. Fortunately for carriers, labor costs are currently borne by billions in federal aid, helping to smooth the blow for the most expensive fuel, Syth said.
Aviation fuel consumption plummeted last year as airlines drastically reduced flights amid falling demand for air travel. This caused prices to drop dramatically and so did airline fuel bills. American Airlines, which stopped fuel hedging in 2014 when oil prices plummeted, said in a securities deposit this week that its $ 3.4 billion fuel bill last year represented just 12% of its costs, compared to a 22% share in 2019 when the price fell and its consumption fell by almost half.
“Based on our predicted 2021 regional and mainline fuel consumption, we estimate that a one cent increase per gallon in aircraft fuel prices would increase our annual fuel expenditure in 2021 by $ 38 million,” said the company in the annual document.
Demand recovery
Aviation fuel consumption in the U.S. so far this year is still almost a third below last year, according to a report from Citi this week.
Supply interruptions were sufficient to raise prices, but to sustain the upturn, travel demand also needs to recover, said S&P Global Platts analyst Lenny Rodriguez. Transport Security Administration’s daily airport screenings averaged more than 810,000 a day this month, compared with 2.1 million during the same period last year.
This weak demand makes refining aviation fuel compared to other oil products less attractive.
“This is the delay for all oil products,” said Rodriguez.