Jet fuel represents the single largest operational expense for the airline industry, which is expected to rise to 25% this year.
Since jet fuel or aviation turbine fuel (ATF) represents the single biggest element of an airline’s cost base, a marginal change in crude oil prices can significantly impact the industry’s profitability.
Over the last 20 years, ATF averaged 25.6% of an airline’s operating costs, IATA data reveal. And that ranged from about 12.5% in 2002 up to 38% in 2008.
At $192bn, fuel will be the industry’s largest cost item in 2022 (24% of overall costs, up from 19% in 2021). This is based on an expected average price for Brent crude of $101.2/barrel and $125.5 for jet kerosene, according to the International Air Transport Association.
Airlines are expected to consume 321bn litres of fuel in 2022 compared with the 359bn litres consumed in 2019, the global body of airlines says.
The jet fuel price started to rise sharply after Russia’s invasion of Ukraine in February. By the second week of May, the IATA jet fuel monitor showed that the price had gone over $176 per barrel, 11.6% more than a month earlier.
This put the price at almost 150% more than the previous year although there were significant variations by region. Jet fuel prices were highest in North America, which accounts for 39% of global usage and where the price hit $200 per barrel.
War in Ukraine is still keeping prices for Brent crude oil high. Nonetheless, fuel will account for about a quarter of costs in 2022, IATA noted. A particular feature of this year’s fuel market is the high spread between crude and jet fuel prices.
This jet crack spread remains well above historical norms, mostly owing to capacity constraints at refineries. Under-investments in this area could mean that the spread remains elevated into 2023.
Consequently, airlines hedge a large portion of their annual fuel consumption at lower oil prices in order to protect themselves from the volatility in oil prices.
An issue that is on the minds of airline management teams at the moment relate to the rising cost of oil, and jet fuel in particular, noted Willie Walsh, IATA director general.
“Fuel represents the single biggest element of an airline’s cost base. So clearly, you know, this is something that airlines will be closely monitoring.
“And given what we have seen over the last couple of years, it is unlikely that most airlines will have significant hedging in place to protect them against this increase in the oil price. So I think this will be a factor certainly playing into fares as we go through the year if the oil price remains high,” Walsh noted recently.
According to OAG, a UK-based global travel data provider, fuel price can have a significant impact on airline costs and profitability given that it is a major cost component for airlines, and one priced in US dollars.
At times of surging fuel prices one response by airlines has been to impose fuel surcharges on top of the base fares for flights.
The sudden increase in the price of jet fuel in the first quarter of 2022 triggered the reintroduction of fuel surcharges by a number of airlines. The first were seen to impose fuel surcharges in March, effectively adding this element to the price of an airfare.
On expectations for fuel surcharges for the rest of the year, OAG says, “Almost certainly we will see more surcharges and the levies may rise. Partly this is a function of rising demand for air travel as recovery gets underway, and therefore more demand for jet fuel, but it is also a result of supply-side issues.
“Refineries, which haven’t needed to produce quantities of jet fuel that they used to before the pandemic, now need to increase production in an environment where there are competing calls on their capacity.”
While fuel surcharges are not welcomed by passengers, they remain largely hidden as travellers are presented with the all-in price, OAG says. But for airlines, fuel surcharges are an effective means to address the sharp increase in fuel costs.
Industry outlook remains rosy with people keen to fly in ever greater numbers around the world. Strong pent-up demand, the lifting of travel restrictions in most markets, low unemployment in most countries, and expanded personal savings are fuelling a resurgence in demand that will see passenger numbers reach 83% of pre-pandemic levels in 2022.
Clearly billions of dollars will be raised as fuel surcharges this year, allowing airlines to offset the extra costs, and ward off challenges to their financial recovery.
Source: Civil Aviation Authority-Qatar