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How Does This Affect Airlines?
Jet fuel prices in the
U.S. are up around
30%
compared to the same
time last year.
Higher oil prices result in higher jet fuel and diesel prices and as fuel is one of the key expenses for airlines, a spike in the cost of fuel gets passed on to consumers through higher air fares. Jet fuel prices in the U.S. are up around 30% compared to the same time last year, which will also weigh on the earnings prospects of airlines. “Management teams attempt to recapture higher input costs from customers through revenue initiatives – which usually mean price increases for customers,” said J.P. Morgan Lead U.S. Airlines and Aircraft Leasing Equity Analyst, Jamie Baker. This tends to hit American airlines the hardest because unlike European and Asian airlines,
most of them do not hedge or have insurance in place for higher oil prices.
Will This Impact the Cost of Travel?
As travel is a planned event, most summer bookings have already been made prior to fuel’s most recent run-up. There’s not much airlines can do to recoup the higher costs in the immediate term, apart from adjusting the pricing on remaining seats – so procrastinators will likely feel the spike in fuel prices reflected in their summer airfares. Post Labor Day, travelers should expect to see the industry start to recalibrate for higher fuel through the form of higher ticket prices and also by curtailing capacity.
“For corporate travel, which is more of a mid-to-late September event, business travelers can expect both higher ticket prices and potentially slimmed down schedules unless fuel prices very quickly recede,” said Baker.
Post
Labor Day,
travelers should expect to see the industry start to recalibrate for higher fuel through the form of higher ticket prices.
As airlines reduce the overall number of seats going on sale, the remaining seats will likely be allocated towards higher fares, meaning customers looking for cheap, last minute seats will also be affected. By 2019, higher fuel will be incorporated into higher ticket prices more generally. U.S. passenger airlines are prohibited by law from charging formal fuel surcharges for domestic travel, but enjoy greater flexibility internationally to apply fuel surcharges, so this will be reflected in long haul flights.
“We aren’t expecting huge fare increases. Current gas prices are manageable but fuel is more expensive than this time last year. If one were to engage in identical travel plans in 2019 compared to 2018, I think it’s reasonable to expect that your airfare component would likely be around 10% higher. If you’re flying long haul or as a family, that could be a relatively meaningful increase,” Baker added.
What’s the Outlook for the Oil Price?
The J.P. Morgan central scenario forecasts Brent at $72 per barrel (bbl) in the third quarter of 2018 and $63/bbl in the fourth quarter on average, but there is a positive risk bias largely based on the outlook for Iranian oil exports.
Source: ICE, NYMEX, Bloomberg, J.P. Morgan Commodities Research, As of June 8, 2018
Source: ICE, NYMEX, Bloomberg, J.P. Morgan Commodities Research, As of June 8, 2018
“Geopolitical tensions and lingering risks of large supply disruptions led by U.S. sanctions on Iran add an upward risk bias to oil prices in the months ahead meaning oil prices could be pushed to the high case scenario ($77 bbl) in the near term,” said J.P. Morgan’s Abhishek Deshpande. At the same time, if oil prices remain high ahead of the U.S. mid-term elections in November, there is an increasing risk that the U.S., or its OECD allies, could respond by releasing strategic petroleum reserves to ease price pressure. Sustained higher oil prices would also be negative for oil products demand growth in the short term.
Head to J.P. Morgan Markets for more on airlines and the oil market