Book Flights This Summer While Fuel Costs Stay CheapBy
Lowest fuel prices in 12 years translate to lower airfares
Airlines are finding ways to put more planes in the sky
It’s the best summer for jet setting in more than a decade.
As jet fuel costs have sustained near 12-year lows after a global crude market crash in late 2014, airlines are cutting ticket prices and travelers have noticed. Global passenger data show that air travel demand started the second quarter at growth rates unseen in six years, and U.S. carriers hauled more passengers than ever before last year.
Worldwide, first quarter air travel costs dropped about 10 percent compared with the same period a year ago, according to the International Air Transport Association. About one-third of those costs can be linked to cheaper fuel, according to Savanthi Syth, senior vice president of airlines global research Raymond James & Associates, Inc.
“Airline fares are set based on demand. But when fuel is low, and when a third of your cost drops by 50 percent, when it drops that much you do tend to grow,” she said by phone from St. Petersburg, Fla. “You can offer lower fares and stimulate traffic.”
Wholesale jet fuel prices in the U.S. Gulf Coast now stand at $1.27 a gallon compared with $2.80 in June 2014, according to spot market pricing gathered by Bloomberg Wednesday.
The best way to generate more air traffic is to put more planes in the sky.
“The big driver for jet demand is not so much the rise in passengers. But you need to get more planes flying,” Robert Campbell, head of oil products research for Energy Aspects Ltd said by phone from New York.
This doesn’t necessarily mean making fresh fleet orders. Instead, airlines are increasing use of aircraft they already own by adding extra flights like discounted red-eyes, according to Syth.
“At high fuel prices that red-eye flight didn’t make sense,” she said.
Rising demand spurred by lower prices has helped reduce nationwide supplies after they neared a seasonal 15-year high in the first quarter. Airlines hauled a record 822 million travelers last year, government data show, but jet fuel consumption didn’t increase at the same pace. That’s because fuel efficiency is improving, much like it has in newer cars. But cheaper jet fuel is giving carriers less concern for efficiency these days.
“When jet fuel prices are relatively low, companies that are following the strategies of using older planes for longer can ignore the lower efficiency of the aircraft,” according to Campbell.
Lower fuel prices have become a built-in hedge for U.S. airlines, who’ve been able to run their fleets at lower costs and pass the savings down, said Brian Pearce, IATA’s chief economist.
“Air travel is cheaper, and couple that with the fact that you’re seeing a rise in consumer confidence and economic upturn. We’ve seen really strong growth,” he said by phone from Cancun, Mexico.
Three of the six largest U.S. airlines have dropped their hedging positions, or guards against price spikes, since the beginning of 2014. American Airlines Group Inc. unraveled its hedges in 2014, while Delta Air Lines Inc. and United Continental Holdings Inc. closed hedges last year. Other airlines still have hedges in place, but haven’t added new positions since mid-2015.
“Jet fuel prices have been under a fair bit of pressure from oversupply,” said Campbell. “There’s not a lot of upside right now, given the crude price.”
The forward price curve is showing there’s no real incentive to hedge in the future -- fuel will be lower for longer. The smaller costs coupled with industry consolidation have given U.S. carriers a stronger footing to handle any shocks collectively. And even the airlines that do still hedge, such as Southwest Airlines Co., have changed their strategy, according to Raymond James’ Syth.
“There’s a lot more rationality,” she said. “If fuel spikes, the industry will counteract it without having any players that are off in the wilderness.”