FocusUS airlines could seek to lock jet fuel prices

14 December 2009 21:05  [Source: ICIS news]

By Ryan Hickman

HOUSTON (ICIS news)--The US commercial airline industry could look to lock in jet fuel prices with crude oil below $70/bbl amid outlooks of erratic energy pricing in 2010 as the airline sector shows flickers of recovery, an industry player said on Monday.

"I don't think many have hedged in 2009 or 2010," said Brad Hurwitz, vice president of supply and trading at World Fuel Services. "I would expect some of them might start to look at hedging with this price pull-back."

West Texas Intermediate (WTI) crude oil contracts on the NYMEX closed today's trading session at $69.51/bbl, compared with prices in the high $70s-low $80s/bbl in October and November.

Michael Derchin, an airline analyst with the investment firm FTN Equity Capital Markets, said airlines are reworking their strategies based on uncertainty in jet fuel pricing.

"It's very volatile and the airlines are concerned about spikes in crude oil," Derchin said. "Airlines are very concerned about jet fuel going up. They are keeping capacity more closely in check than if they weren't concerned about fuel."

Jet fuel prices in the New York Harbour (NYH) and US Gulf (USG) coast regions have soared alongside strength in crude oil and heating oil values.

USG cash values were as low as 110.75 cents/gal in March compared with prices around 191.25 cents/gal on 11 December, according to data from global chemical market intelligence service ICIS pricing. 

In the NYH, jet fuel prices were around 193.75 cents/gal on 11 December compared with 115.00 cents/gal eight months earlier.

Closely managing flight capacity is helping the industry claw out from the moribund environment earlier in the year, which also helps lower risks in the unpredictable crude market.

But the question industry observers are looking to answer in the airline industry, is when will demand return?

The US airline sector's advocacy group that the number of passengers flying during the Christmas holidays will contract by 2.5% from last year.

The Air Transport Association (ATA) expects 41m commercial passengers will board planes from 17 December-6 January 2010 compared with 42m last year.

ATA CEO James May said the decline in holiday air travel would come from the continued fragility in the economy and the downturn in air travel that has come as a result.

But industry observers pointed to a pick up in passenger activity during November as evidence that airline strength is starting to take off.

Earlier in the week, major airlines reported November traffic levels as the strongest month since last summer.

"November was better than expected and it was by each airline," Derchin said.

US discount carrier Southwest showed the greatest gain last month posting a near 12% jump in travel while passenger traffic on airline giant Continental climbed 2.7%, according to the two companies.

Derchin explained that positives in the industry moved the ATA to narrow its holiday prediction from a 4.0% drop to a 2.5% contraction.

Julius Malditus, president of Aviation Dynamics, an airline consulting firm in New York, said one of the biggest positives for the industry came from airlines reporting improved business travel, an all-important driver of commercial airline success.

"Basically bookings are building up, but most importantly the business bookings are coming in," he said.

Demand for jet over the past month has been relatively flat versus the same time last year, according data from the US Energy Information Administration (EIA).

The government agency showed jet fuel supplied, a bellwether of demand, was down year over year by 0.7% in the four weeks ended 4 December after showing a 0.1% uptick in the four week leading up to 27 November.

The recovery of the airline industry, and in turn jet fuel demand, ultimately hinges on a healthy economy next year.

"I think the real key issue here is how strong of an economic recovery are we going to have," Malditus said. "Unemployment numbers, which came down a little bit, could very well be a significant factor in limiting the traffic turning positive."

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By: Ryan Hickman
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