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The Price of Jet Fuel and Its Impact on U.S. Airlines

March 9, 2011 By: George Dooley Travel Agent

John Heimlich, Vice President and Chief Economist for the Air Transport Association (ATA) offered his expert view of the current crisis over the price of jet fuel and its impact on U.S. airlines. In a statement Heimlich noted that airlines have limited options to mitigate increased jet-fuel costs. (See Travel Agent, 3/8)

“In 2011, airlines have been contending with rapidly climbing jet-fuel prices that have outpaced crude-oil prices to reach their highest level since September 2008. As of March 4, U.S. Gulf Coast jet fuel sold for $3.20 per gallon. Excluding hedge gains or losses, if U.S. airlines had to contend with $3 per gallon jet-fuel prices for all of 2011, their fuel bill would increase $15 billion, from $39 billion in 2010 to an estimated $54 billion in 2011. “

“The cost of jet fuel is typically an airline’s largest cost center. Annually, a 1 cent increase in a gallon costs U.S. airlines $175 million; a $1 increase in a barrel costs them $415 million. To put this into some context, in 2010, U.S. airlines posted an estimated net profit of $3 billion with a meager 2 percent margin, one of only three profitable years in the entire decade. From 2001-2010, U.S. airlines had a cumulative net loss of approximately $54 billion.”

“Having the airlines’ largest cost center remain so volatile makes business planning extremely difficult. From the end of 2009 to the end of 2010, the price of jet fuel rose 44 cents per gallon. From the end of 2010 to the week ending March 4, 2011, the price of jet fuel rose 67 cents per gallon. When jet-fuel prices rise rapidly, airlines have limited options to mitigate these costs, principally generating more revenue or decreasing nonfuel expenses.”

“As fuel prices increase, flights become less profitable so airlines may also reduce capacity, and some carriers already have reported downward growth plans. Unfortunately, fuel-hedging programs are increasingly expensive and provide only limited protection when jet-fuel prices are outpacing crude-oil prices.”



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By George Dooley | March 9, 2011
Airlines have limited options to deal with higher fuel costs, ATA economist says.
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