FocusNo year-end cheer for US jet fuel demand

09 December 2008 21:08  [Source: ICIS news]

By Ryan Hickman

HOUSTON (ICIS news)--Airline industry officials and analysts on Tuesday painted a bleak picture for the industry over the holiday season and into 2009, with little prospect for a rebound anytime soon in jet fuel prices.

"Spot prices are well below their peaks and there is nothing to suggest that it is going to change any time soon," said Dan Petree, dean of the college of business at Embry-Riddle Aeronautical University.

Holiday travel plans appear weak, he said.

"Leading indicators are that they are soft – hotel reservations in leisure destinations like Las Vegas or Orlando," Petree said. 

"I think everybody would be very surprised if the holiday air travel activity approaches what it has been in the last few years," he said, citing weakness in the wider economy. 

Discounting of fares shows airlines are struggling to sell seats, even after airline companies have reduced capacity and dropped fuel surcharges from ticket prices, Petree said.

"I've seen more aggressive promotion of holiday fare specials," he said. "I think what that suggests is that their revenue management algorithms are that they are not seeing the seats they are expecting."

The Air Transport Association is scheduled to release its projections for US winter holiday travel shortly.

"We are starting to hear some reports of advanced bookings being off significantly, and that of course, is a very ominous sign for what we could be looking at in 2009," John Meenan of the ATA said in a television interview.

A decline in air travel over the holiday season would be a continuation of the trend throughout the year.

The US Bureau of Transportation Statistics' latest statistics said that scheduled passengers on US airlines during the first eight months of 2008 fell by 1.4% from the same time a year earlier.

Delta, the world's largest airline carrier, has warned that demand has slowed this quarter. The Atlanta-based company plans to reduce capacity in 2009 to get in line with current levels of demand.

Delta’s system traffic waned 4.9% last month compared with November 2007.

Northwest’s system traffic in November dropped by 7.4%.

Delta joined with Northwest Airlines in a merger agreement finalised in October to make it the world's largest airline carrier.

Petree said a slow holiday season will not alter jet fuel prices as much as the sluggish air travel numbers in 2008 from reduced business travel during the poor economic environment.

"I think what really affects the price is the continuing economic slowdown," he said. "The commercial aviation industry is highly cyclical. In a recession we always see a demand fall."

The price of jet fuel is largely dictated by the price of crude oil, and it has been a relatively profitable product for refiners in 2008.

The crack spread – the difference between crude oil and jet fuel price - was $26.14/bbl as of 2 December, up from the average of $18.58/bbl for 2007, according to the US Energy Information Association and ATA analysis.

New York Harbor (NYH) prices for US jet kerosene topped out at $4.35/gal in July but have since plummeted, according to global chemical market intelligence service ICIS pricing.

NYH jet fuel was assessed at $1.52-152.50/gal on 8 December.

"Now as oil comes down and base fares remain relatively stable, this is where we are going to test the elasticity of demand," said William Swelbar, the head of MIT's Airline Data Project. "I don't think the summer gives us much insight into that relationship."

The relief from cheaper fuel for the airline companies is offset by the wider economic woes, though. 

"The airlines are suddenly faced with this good news," Petree said. "But the bad news that it's in part to the global economic slowdown."

US jet fuel demand fell to 1.327m bbl/day in the week ended 28 November, compared with 1.492m bbl/day a week earlier and a peak at 1.731m bbl/day in July.

Delta's senior vice president of global sales and distribution Jim Cron said on Tuesday that he expects fuel prices to rise and remain around $2.19/gal in 2009.

Hank Halter, Delta's chief financial officer, projected jet fuel would be $2.49/gal in the first quarter of 2009, $2.26/gal in the second quarter, $2.09/gal in the third quarter and $1.92/gal in the fourth quarter.

In a presentation to investors, Cron also said that the industry's revenue should be down 8-12% in 2009, with domestic capacity down 8-10% and international capacity down 3-5%.

The ATA expects the US industry to lose $5bn (€3.9bn) in 2008.

($1 = €0.77)

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By: Ryan Hickman
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