US jet fuel recovery uncertain as demand hits unprecedented lows

HOUSTON (ICIS)– US jet fuel demand is facing an uncertain recovery as the coronavirus has halted passenger demand around the world and passengers remain hesitant to fly until a vaccine is made, resulting in less travellers and sending financial pain to the airline industry.

Second quarter air travel demand is down 82% year on year, according to The International Air Transport Association (IATA), while revenues are projected to fall by $314bn, a 55% drop year on year.

Even if passengers do fly again, it would be with the new social distancing rules that have been imposed around the world. This would make most airlines nonviable as they would have to restrict their seats, making the cost of the flight higher than what the airline would bring in from ticketed passengers.

IATA, an industry trade group, said in a statement, “Depending on the aircraft type and the seat configuration, social distancing could reduce the available seat capacity by 33-50%…we estimate that such social distancing would reduce the bookable seat capacity to 62% of normal capacity.”

Load factor, the proportion of seats filled on a plane, is an important indicator of financial performance for an airline. According to IATA, airlines break even, on average, at a 77% load factor.

With airlines running below the average breakeven point, it could spell financial troubles in the near future.

“In order to cover the costs of a flight with fewer passengers on board, airlines would likely need to increase air fares just to break even. However, raising air fares in an environment where demand is expected to be weak and slow to recover is unlikely to be possible, at least initially,” IATA said in a statement.

“I think you are going to lose a good chunk of the jet demand that would have been associated with business travel. Our base case is you lose somewhere around 2m to 3m bbl/day of that,”  said Jeff Currie of Goldman Sachs in a CNBC interview.

In previous earnings calls, many refiners have discussed the future of jet fuel demand with some saying that people will not be flying in any strong amount until a vaccine is made and that US gasoline demand is what is going to save the refined products sector while jet fuel will lag.

US refiner Marathon Petroleum said jet fuel recovery will be slower than other products as more consumers select driving over flying out of fears of the coronavirus.

Marathon is also on the list of other US refiners that have begun to blend their jet fuel into diesel as a way to offload excess jet fuel supply in this unprecedented market.

“The financial impact of the current crisis is unlike anything we have ever seen and requires urgent action by governments to assist the aviation industry to protect jobs, ensure essential operations, and plan for recovery,” Angela Gittens, director general at Airports Council International (ACI), said in a statement. 

Focus article by Alex Snodgrass