The staggering rise in the cost of jet fuel has driven up airfares, and industry experts say their prices are likely to rise. Right now, travel-hungry consumers seem more than willing to pay.
Jet fuel prices have stabilized somewhat since the Russian invasion of Ukraine skyrocketed last month, but the market remains highly volatile. The problem is particularly serious in New York, where fuel costs quadrupled to just over $7.50 a gallon before dropping back to $5.30 in recent days.
Supply is widely restricted and prices are up across the country. The Energy Department said this week that the level of East Coast jet fuel stocks reached 6.5 million barrels, the lowest level since the agency began tracking it in 1990.
“Jet fuel has had the largest parabolic movement I have ever seen for transportation fuels,” said Tom Kluza, global head of energy analysis for the Oil Price Information Service. “It’s just crazy.”
The price hike has implications not only for airline tickets but also for the already high costs of global shipping. On Wednesday, for example, Amazon announced its plans to impose its first “fuel and inflation surcharges” for sellers whose goods it stores and delivers.
Airlines have been able to pass on some of the added fuel expense to consumers, many of whom are eager to travel after being denied the opportunity for two years.
At the beginning of this year, the average cost of a domestic round-trip was $235, according to Hopper, an airline ticket price-tracking app. Since then, ticket prices have gone up 40 percent, to $330. Adit Damodaran, an economist at Huber, which tracks airfare and hotel prices, said the company expects a further 10 percent increase, to $360, by the end of May, before prices drop again in the summer.
“Not only are the current prices paid by travelers very high compared to historical price data, but the rate of increase has also been particularly sharp since January,” he said.
Mr Damodaran said that in addition to the rising cost of jet fuel, the increase in airfares could also be attributed to typical seasonal patterns and the fact that demand was suppressed at the start of the year with the spread of the Omicron coronavirus.
Some airlines have also cut flights in response to the ongoing staff shortage, which has increased competition and raised prices for remaining flights.
Experts said that carriers usually pass on to consumers up to 60 percent of a volatile fuel price increase, a process that usually takes months. But this time around, the industry has been able to pass costs on more quickly, due in large part to higher demand and a shift in consumer behavior during the pandemic toward purchasing tickets closer to travel time.
“We managed to recover a significant portion of the increase in fuel,” Ed Bastian, CEO of Delta Airlines, told investment analysts and reporters on a call Wednesday. “This happens almost in real time, given the strong demand environment.”
Mr. Bastian said Delta, the first major airline to report its financial results for the first three months of this year, has seen a strong recovery so far and is preparing for a strong spring and summer.
Delta paid an average price of $2.79 per gallon of jet fuel in the quarter, up 33 percent from the last quarter of last year. The price included savings of 7 cents a gallon from the airline’s oil refinery outside of Philadelphia. Delta said it expects the fuel price to rise another 15 to 20 percent over the next three months, to between $3.20 and $3.35 a gallon, a range that includes savings of nearly 20 percent that are attributed to the refinery.
Jet fuel prices, 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 risen by more than a third over the past year, from $1.48 in 2020 to $2.04 in 2021. At the time, it said each has continued to rise by A cent in and a gallon of fuel expenditures for 2022 will raise about $40 million. This week, the American estimated it paid $2.80 to $2.85 a gallon in the first quarter.
It seems that rising fuel prices and costs do little to dissuade consumers. Mr. Bastian said Wednesday that March was Delta’s best sales month ever, beating the record set in 2019, despite having 10 percent fewer seats available. It comes as domestic airfares rose nearly 20 percent between March 2019 and March 2022, according to an analysis by the Adobe Digital Economy Index, which is based on online sales from six of the 10 largest US airlines.
“We’ve all been stuck at home for two years, and I think now that we’ve had a chance to get out, there’s going to be a lot more willingness to pay,” said Joe Rollina, senior airline analyst at Fitch Ratings. “If traveling further away remains expensive, you might see that kind of willingness to pay higher ticket prices again.”
The Russo-Ukrainian War and the Global Economy
The pandemic has severely curtailed air travel, so it is not surprising that jet fuel prices have fallen deeper than gasoline prices two years ago. For most of 2020, as the pandemic choked transportation of all kinds, US refineries cut their production of jet fuel — usually a reliable source of profit — by as much as 1 million barrels a day.
But even in cyclical businesses like refining, the recovery of jet fuel has been great.
Richard Joswick, head of global oil analytics at S&P Global Commodity Insights, said jet fuel pipeline flows, while increasing, have not kept pace with demand.
Some of the shipments that were supposed to go to New York this month were redirected via the Panama Canal to Los Angeles as California fuel prices began to rise. Other fuel was redirected to Baltimore and Washington as supplies ran out there.
“It’s like a water balloon – you hit it in one place, and it inflates in another,” said Mr. Joswick.
Experts expect prices to rise in the Rockies 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 storing only a three-day supply, putting schedules at risk if there is a bad event like hurricanes.
Refineries produce jet fuel from the same batch of oil as diesel, and refineries produce as much diesel fuel as possible. Europe has scaled back its purchases of Russian diesel since the invasion of Ukraine, and instead has imported more diesel from the United States, even as truck and rail traffic here recover.
Refinery closures in Europe and North America in recent years have been another contributing factor. Since January 2019, refining capacity has fallen 5% in the United States and 6% in Europe, according to Dallas-based consultancy Turner, Mason & Company.
It was difficult to produce more jet fuel when the market was asking for more diesel, and it was also difficult to produce more diesel when the market was asking for more jet fuel, said John Owers, Mason’s executive vice president. “People travel, drive, fly, and there’s more trade, so we’ll have a tight market,” he said.
While rising jet fuel costs have hurt airlines and consumers, refinery executives are happy to work overtime after two years of meager profits.
“Travel and fuel demand are up, and with the Russian invasion impacting prices, fortunately or unfortunately, this bodes well for oil companies and jet fuel producers,” said Linda Salinas, vice president of operations for Texmark Chemicals in Texas. which produces renewable aviation fuel from non-distilled diesel fuel made from used and waste cooking oil.