11 June 2012 21:00 [Source: ICIS news]
HOUSTON (ICIS)--The recent drop in spot US jet fuel prices may boost the airline industry’s revenue if prices do not remain low because of weakening demand, an analyst said on Monday.
According to John Heimlich, vice president and chief economist at US industry group Airlines for America, in 2011, there was a minimal 0.4% profit margin for each airline ticket bought, which is equivalent to net income of 80 cents/passenger.
In the first quarter of 2012, the airline industry posted a loss and it is now counting on a strong second and third quarters, which are typically busier because of summer travel, to offset the loss.
Jet fuel prices, the biggest expense for airlines, in the spot market fell by more than 10 cents/gal from trading on 20 May to 8 June for the US Gulf and east coast regions. The drop was prompted mostly by lower heating oil futures, the main driver in spot jet fuel prices.
Spot prices were assessed on 8 June at $2.7625-2.7650/gal in the New York Harbor and at $2.7125-2.7150/gal in the US Gulf region.
Like other commodities, demand for jet fuel has also dropped, which was another factor in the lower spot prices. For the week ended 1 June, jet fuel demand was 2.8% below levels from the same time period one year ago, according to the US Energy Information Administration’s weekly data.
Despite lower demand for petroleum liquids, Heimlich said airlines are still paying about a $30/bbl premium over West Texas Intermediate crude, which is something that will always have an impact on prices.
In the spot market, the jet fuel premium in the New York Harbor region was more than $33/bbl and more than $30/bbl in the US Gulf region on Monday.
Historically, Heimlich said airline ticket costs do not typically track an increase in fuel prices because of market competition.
“One never wants a weak economy or demand, but higher fuel prices do tend to flow through more quickly because a good amount of revenue is booked in the future,” he said. “Airlines can adjust capacity more quickly than in the past, but ultimately this industry has shown it can cope pretty well with higher fuel prices. Softness in the revenue picture would be more problematic. But it’s not something we detect at the moment.”
($1 = €0.80)
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