TREND OF JET FUEL PRICE AND ITS IMPACT ON AIRLINES
Table of Content
- Price of Jet Fuel over the Last 15 Years……………………………..………….…….4
- Challenges Managers were presented with……………………………………………7
- Approaches used to mitigate the Volatility……………………………………………9
- Reference List……………………………………………………………..…………11
Trend of Jet Fuel Price and its Impact on Airlines
For every flight, jet fuel accounts for nearly 40%-50% of the operating cost, depending on the kind of plane utilised. Whereas jet fuel prices were considerably stable in the 1990s, Blas (2022) writes that “the emergence of the 21st century saw a considerable upsurge in price and incidences of fluctuations became rampant.” Since 2000, the airline sector has encountered a context characterised by volatility and considerably higher fuel prices (The Transport of Transport 2022). Hence, this essay looks into the trend of jet fuel over the past fifteen years (2007-2022). Whereas the prices have dropped in between 2007 and now, they have also increased in some instances, making it difficult to predict the pattern. However, the recent years has seen a spike in the price of the fuel per gallon, something that proves to be a real threat to airline firms that rely on this valuable commodity for their services. The fluctuation has presented managers with considerable challenges that compel various operators to use approaches that they think would most appropriately get the firm out of the stalemate. The increasing trend witnessed in the recent years reaffirms the need to embrace effective regulatory measures to avoid experiencing harsher effects followed unpredicted or unplanned hikes.
Figure 1, overview of the increasing prices over the years (Statista 2022)
2.0. Price of Jet Fuel over the Last 15 Years
Overall, the price of jet fuel has recorded a progressive trend in the past 15 years. Data by the Transport of Transport (2022) inform that “the average price for jet fuel between 2007 and 2008 was $3.0 per gallon before going down to a mean of $2.0 between 2009 and 2010.” The first three months of 2007, according to the data, the average price per gallon was about $1.65 before increasing slightly to an average of $2.10 from May 2007. The rate went higher to about 2.50 at the start of 2008 and reached a peak of 3.9 in June 2008. However, the prices dropped significantly towards the end of 2008 with each gallon costing about 1.73 (The Transport of Transport 2022). The whole of 2009 enjoyed relatively stable prices with consumers purchasing the commodity with as low as 1.29 in February 2009 (EIA 2022). It would be right to argue that operators in the airline sector gained much returns from their activities in 2009 due to the low fuel costs. The same trend extended to 2010 where at no time did buyer purchase the fuel at $3 and above (EIA 2022). The highest rate ever witnessed during the year was 2.47, which was recorded on the last week of December, when the year was coming to an end.
The prices took an upward trend again in 2011, 2012, and 2013 before depreciating slightly in 2014, 2015, and 2016. “The price for each gallon during most time of 2011 was above 3.0” (The Transport of Transport 2022). However, the rate sometimes dropped below the $3 mark. For instance, during the first two months of 2011, buyers bought the fuel at utmost 2.95. However, the rate remained abouve 3.12 for the next three to four months. The situation was not any better in 2012 where at many times of the year, the fuel retailed abouve $3 (EIA 2022). The situation remained the same for a better part of 2013 where even though the $3 mark was not dominant, the least buyers paid during this time was 2.72 (The Transport of Transport 2022). At the time 2013 was coming to a close, the price per gallon was 3.02. Airline operators were relieved in 2014 when the prices dropped further. By the last month of the year, consumers were getting the commodity at 1.63, a considerable drop compared to the past year (EIA 2022). In 2015, the priced dropped even further with at no time did the rate go beyond the $2 mark. At the time 2015 was coming to a close, the fuel retailed at 1.02. The situation maintained throughout 2016 when the average price was 1.30. The analysis reveals a downward trend during the identified period.
The global increase on price from 2011 through 2013 impacted on major airlines including Emirates that has achieved numerous international accolades for its outstanding performance. Whereas the airline spent $5,677 million on fuel in the year 2010-2011 when the group used 5,149 tonnes of fuel, the figure escalated to $6,610 million in 2011-2012 and $7,580 million in 2012-2013 when it consumed 7,171 tonnes. The price per barrel also increased during the period from 114.4 in 2010-2011 to 119.3 in 2012-2013. The following table provides more insight into how the hike impacted on Emirates;
Figure 2, increase in fuel expense at Emirate (Finance Training Course 2013)
Throughout 2017 to 2021, the rates have never surpassed the $3 mark, thus maintaining some level of stability in price. Data by EIA (2022) confirm that “in 2017, the highest purchasers paid for the gasoline was 1.80, which was achieved in December.” The lowest price during this time was 1.29. However, at some point in 2018 buyers paid above $2, although the product retailed within the $1 range at some points of the year (EIA 2022). For instance, whereas jet fuel retailed at 2.07 in May, the rate had dropped to 1.60 by December. Operators in the sector had much to celebrate between 2019 and 2020 when the rates were considerably lower. In 2019, the rate hardly surpassed the $2 rate with the level achieved only twice in the whole year – in April and May (The Transport of Transport 2022). 2020 witnessed some of the lowest rates ever to be recorded since 2007. For the first time, the price went below the $1 mark with purchasers buying the item for as low as 0.71 in April and 0.98 in September before returning to 1.34 by the end of the year. In 2021, the rate maintained at an average of 1.70 before hitting the $2 mark at the end of the year.
However, 2022 has set new records in the past 15 years. The average rate between January and February was 2.60. The rate went higher in March reaching as high as 3.76 at the time the month was coming to an end. The situation deteriorated in April when the prices shot to as much as 3.85. The situation did not become any better in May with the prices hitting an all-time high of 4.26 (EIA 2022). Today, the price of fuel jet is 4.21, an indication that it has increased almost two three-fold compared to the same time last year (Jet-A1-Fuel 2022). It is apparent that the increasing trend causes much worry and fear among airlines that may be compelled to think that the rate may go beyond unbearable ranges. The situation was not any better in Singapore where as it emerges in the data below, the price per barrel took an upward trend from 2020, increasing from below $50 to above $150 in 2022;
Figure 3, increase in price per barrel in Singapore (Bakheit 2022)
3.0 Challenges Managers were presented with
Airline managers have had to grapple with the reality of increasing fuel prices with many leaders having to cope with difficult times. “In an attempt to maintain their revenue within acceptable limits”, Harper (2022) writes, “administrators have had to upsurge charges to equal present developments.” Increasing fares has direct impact on how passengers use air transport with more buyers choosing either not to travel for unnecessary reasons or use alternative means of transport where possible (Harper 2022). In addition increasing fuel prices has direct effects on operating costs, something that is a real threat to airline managers. Willie Walsh who serves as the Director General of IATA mentioned before a media briefing at the beginning of 2022 that the fuel prices that have increased beyond predicted levels in October 2021 compound the other issues that airlines are currently experiencing (Harper 2022). The challenges include increased labour costs amid employee deficiency being witnessed in economies around the globe (Morrison et al. 2010, p. 3). It is apparent from the description that many managers will have to deal with emerging financial constraints with the worst hit firms being those that are yet to garner a larger share of the market (Gaudenzi & Bucciol 2016, p. 978). Increase in fuel prices trigger ratings in the stock markets and could influence exchange rates, factors that Horobet et al. (2022, p. 277) believe determine financial performance. Hence, managers must identify techniques that would help them get over the problem.
The other challenge the managers have had to deal with as a result of the escalating fuel prices is trouble predicting business operations. Forecasting according to Mas-Machuca et al. (2014, p. 2) “is vital to organisations because it cultivates the ability to make well-versed choices and build data-driven approaches”. Lawrence and Rombe (2018 p. 196) also support forecasting in business arguing that it provides insight into what may happen in future. In an airline business, decisions are arrived at depending on present market factors and predictions on how the future appears (Piranti 2021, p. 5487). However, when a business cannot make projections of its future developments or sector depending on patterns and trends of current and past data, it may lose tract on how to plan strategically and distribute resources for ongoing and future projects and costs (Polat 2007, p. 383). Evidence by IHS Markit (2018) suggests that fuel demand may go high to as much as 5000 barrels per day by 2040, an indication that could also impact on the price. Consequently, being able to predict such trends make it possible to embrace effective plans going forward.
Figure 4, possible increase in jet fuel demand in future (IHS Markit 2018)
4.0 Approaches used to mitigate the Volatility
To safeguard their operations, and even take advantage of a price hike, many airline firms usually hedge their fuel prices. Hence, Lim and Hong (2014, p. 34) write that “operators do this by buying or selling the predicted forthcoming fuel charges via an assortment of derivatives.” Fuel hedging, which is a widely applied risk management tool in the airline sector has generally been advantageous to the airline with regard to managing cost of fuel. The approach also provides an opportunity to generate profits and stabilise cash flows at a time when fuel prices skyrocket (Morrell & Swan 2006, p. 8). Southwest Airlines is an American airline that deploys fuel hedging as an approach of dealing with hiking prices. The firm adopted the approach in 2001 after Scott Topping, the then Director of Corporate Finance at the company, was concerned about the impact of fuel cost on the airline. The decision to embrace the management technique followed a prolonged period of high fuel cost that had caused devastating implications in the airline sector (Carter et al. 2004, p. 1). Using the mitigation approach helps the airline deal with the unpredictable jet fuel prices as effectively as possible.
An analysis of the trend of fuel price in the past 15 years reveals an increasing trend. In 2007 and the following years the price of jet fuel was considerably high before dropping. At some point the commodity traded below the $1 mark. Nonetheless, 2022 has proved a little difficult for airline firms that have to purchase fuel for as much as $4. The unpredicted surge creates many problems to airline managers who have had to increase airfares to cover for increasing expenditure. It also becomes difficult for leaders in the airline sector to forecast and understand future trends. Firms such as Southwest have made tremendous strides in handling hikes in prices by relying on the fuel hedging method that also serves as a risk management tool.
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