A staggering rise in the cost of jet fuel has sent airfares skyrocketing, and industry experts say they are likely to go even higher. For now, however, starving consumers seem more than willing to pay.
Jet fuel prices have stabilized somewhat since the Russian invasion of Ukraine soared last month, but the market remains extremely volatile. The problem is especially severe in New York, where fuel costs roughly quadrupled to just over $7.50 a gallon, before falling back to $5.30 in recent days.
Supply is generally limited and prices have risen across the country. The Department of Energy said this week that East Coast jet fuel stockpiles stood at 6.5 million barrels, the lowest since the agency began tracking in 1990.
“Jet fuel has created the most parabolic movement I have ever seen for any transportation fuel,” said Tom Kloza, global head of energy analysis at Oil Price Information Service. “It’s just insane.”
The price hikes not only affect airline tickets, but also the already high cost of worldwide shipping. On Wednesday, for example, Amazon announced plans to impose its first “fuel and inflation surcharge” on sellers whose goods it stores and delivers.
Airlines have been able to pass some of their additional fuel costs on to consumers, many of whom are more than eager to travel after being denied the opportunity for two years.
At the beginning of this year, the average cost of a domestic flight was $235, according to Hopper, an airline ticket tracking app. Since then, ticket prices have risen 40 percent to $330. Adit Damodaran, an economist at Hopper, which tracks prices for flights and hotels, said the company expects another 10 percent by the end of May, to $360, before prices go up in May. fall again in the summer.
“Not only are current prices paid by travelers extremely high compared to historical price data, but the rate of increase has been particularly steep since January,” he said.
In addition to the rising cost of jet fuel, Mr Damodaran said, the increase in airfares can also be attributed to typical seasonal patterns and the fact that demand was stifled at the start of the year as the Omicron coronavirus variant spread.
Some airlines have also canceled flights in response to ongoing staff shortages, creating more competition and raising fares on the remaining flights.
Carriers typically pass on to consumers as much as 60 percent of a volatile rise in fuel prices, experts say, a process that usually takes months. This time, however, the industry was able to pass costs on more quickly, largely due to high demand and a shift in consumer behavior during the pandemic towards buying tickets closer to the travel date.
“We are successfully retaking a significant portion of the fuel lead-up,” Delta Air Lines CEO Ed Bastian said on Wednesday during an appeal to investment analysts and reporters. “This is happening in near real-time, given the strong demand environment.”
Mr Bastian said Delta, the first major airline to report financial results for the first three months of this year, had seen a strong rebound so far and was preparing for a robust spring and summer.
Delta paid an average price of $2.79 per gallon of jet fuel in the quarter, 33 percent more than in the last quarter of last year. The price included a saving of 7 cents a gallon from the airline’s oil refinery outside of Philadelphia. Delta said it expected fuel prices to rise another 15 to 20 percent over the next three months, to between $3.20 and $3.35 per gallon, a range with savings of about 20 cents attributable to the refinery.
Prices for jet fuel, such as gasoline and diesel, generally go up and down with crude oil.
In February, American Airlines reported that the price it paid per gallon of jet fuel had increased by more than a third in the past year, from $1.48 in 2020 to $2.04 in 2021. At the time, it said every sustained one cent increase in price per gallon, fuel costs would increase by about $40 million by 2022. This week, American estimated it paid $2.80 to $2.85 a gallon in the first quarter of the year.
Rising fuel costs and tariffs do not seem to deter consumers. Bastian said on Wednesday that March was Delta’s best sales month ever, beating a record in 2019 despite a 10 percent reduction in seats. That’s because domestic fares increased by about 20 percent across the board between March 2019 and March 2022, according to an analysis of the Adobe Digital Economy Index, which is based on online sales of six of the top 10 U.S. airlines.
“We’ve all been stuck at home for two years, and I think now that we have a chance to get out, there’s going to be a lot of willingness to pay,” said Joe Rohlena, chief airline analyst for Fitch Ratings. “If it continues to be expensive to travel further afield, then you may see that kind of willingness to pay higher ticket prices.”
The war between Russia and Ukraine and the world economy
The pandemic has severely reduced air traffic, so it was no surprise that jet fuel prices fell even more deeply than gasoline prices two years ago. For much of 2020, as the pandemic curtailed transportation of all types, U.S. refineries cut their production of jet fuel — usually a reliable profit maker — by as much as a million barrels per day.
But even in an industry as cyclical as refining, the recovery for jet fuel has been remarkable.
Richard Joswick, head of Global Oil Analytics at S&P Global Commodity Insights, said jet fuel pipeline flows, while increasing, had not kept up with demand.
A few shipments due to go to New York this month were diverted via the Panama Canal to Los Angeles as fuel prices in California started to rise. Other fuel was diverted to Baltimore and Washington as supplies were running out.
“It’s like a water balloon – you squeeze it in one place, it bulges out in another,” said Mr Joswick.
Experts predict price spikes in the Rocky Mountain region and the West Coast as the summer travel season peaks in July and August. Stocks are also low elsewhere in the country, with many airports holding only a three-day supply, jeopardizing schedules in the event of inclement weather, such as a hurricane.
Refineries produce jet fuel from the same batch of oil as diesel, and refineries produce as much diesel as possible. Europe has halted its purchases of Russian diesel since the invasion of Ukraine and has instead imported more diesel from the United States, even as truck and rail traffic has recovered here.
The closure of refineries in Europe and North America in recent years has been another contributing factor. According to Turner, Mason & Company, a Dallas consulting firm, refinery capacity has declined 5 percent in the United States since January 2019 and 6 percent in Europe.
John Auers, Turner, Mason’s executive vice president, said it was difficult to produce more jet fuel when the market demanded more diesel, and equally difficult to produce more diesel when the market demanded more jet fuel. “People travel, drive and fly, and there’s more trade, so we’re getting a tight market,” he said.
While higher jet fuel costs hurt airlines and consumers, refinery managers are pleased with the extra business after two years of meager profits.
“Travel is on the rise and demand for fuel is soaring, and with the Russian invasion affecting prices, luckily or unfortunately this bodes well for oil companies and jet fuel manufacturers,” said Linda Salinas, vice president of operations at Texmark Chemicals. , a Texas company. which produces renewable jet fuel from non-distilled diesel made from used cooking oil and waste.
