Airlines' Latest Challenge: Rising Jet Fuel Prices

Andrew Harrer | Bloomberg | Getty Images
  • Jet fuel prices this week rose to nearly 13-month highs, boosted by increased oil costs.
  • Airline jet fuel consumption has dropped along with travel demand in the Covid pandemic, a trend that will likely keep a lid on prices.
  • Some carriers have noted they expect higher fuel costs in the first quarter.

The oil rally is taking jet fuel along for the ride, posing another headache for airlines still struggling from depressed travel demand in the Covid pandemic.

U.S. jet fuel prices reached a nearly 13-month high of $1.67 a gallon on Wednesday, according to S&P Global Platts data, a climb led by an arctic blast and winter storms that disrupted oil production, refining and transportation. Millions were left in the cold and the dark in Texas, which largely relies on natural gas for heat and power.

"We were expecting fuel to be at these levels by the second half of the year," said Raymond James airline analyst Savanthi Syth. Costlier fuel can make it harder for airlines to stem their cash burn, a goal that has already been delayed due to weaker-than-expected demand.

Cost headwind

Spirit Airlines CFO Scott Haralson during a Feb. 11 earnings call cited higher fuel costs as being among the discount airline's first-quarter challenges. The carrier expects fuel costs to be up 32% this quarter from the last three months of 2020. Greg Anderson, CFO of Allegiant Air parent Allegiant Travel Co., also cited higher fuel costs as a headwind during a Feb. 3 quarterly call.

Jet fuel production is one of airlines' biggest expenses along with labor. Luckily for carriers, labor costs are currently supported by billions in federal aid, helping soften the blow of more expensive fuel, Syth said.

Consumption of jet fuel plunged over the last year as airlines sharply reduced flying amid a drop in air travel demand. That sent prices sharply lower and airlines' fuel bills down with it. American Airlines, which stopped hedging fuel in 2014 when oil prices cratered, said in a securities filing this week that its $3.4 billion fuel bill last year made up just 12% of its costs, down from a 22% share in 2019 as the price dropped and its consumption roughly halved.

"Based on our 2021 forecasted mainline and regional fuel consumption, we estimate that a one cent per gallon increase in the price of aircraft fuel would increase our 2021 annual fuel expense by $38 million," the company said in the annual filing.

Demand rebound

Jet fuel consumption in the U.S. so far this year is still off by almost a third from last year, according to a Citi report this week.

The supply disruptions were enough to drive up prices, but to sustain their climb travel demand needs to rebound as well, said S&P Global Platts analyst Lenny Rodriguez. The Transportation Security Administration's daily airport screenings have averaged more than 810,000 a day this month compared with 2.1 million during the same period last year.

That weak demand makes refining jet fuel compared with other oil products less attractive.

"This is the laggard for all the oil products," Rodriguez said.

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