Looming “Oil Cliff” Pinches Airline Profits, Traveler Wallets

While there’s never a bad time to visit Maui, your wallet would have preferred a February booking.

The world will be short some 350 million barrels of jet fuel and other refined crude products by the end of April as the war in Iran keeps the Strait of Hormuz closed, Ryan McKay, TD Securities senior commodity strategist, said in a note published Thursday. It’s enough to make travelers rethink their summer plans and poses a serious threat to the aviation industry’s margins. The sky is falling … though some airlines are a little less exposed than others.

Postcards from the Edge

Average jet fuel prices across the globe have risen faster than oil prices, soaring about 100% in the month since the Iran war started, according to the International Air Transport Association. There’s a chance (perhaps a likelihood) that the worst is ahead. Compounding supply losses are pushing the world toward an “oil cliff” come April 19, barring a quick de-escalation, according to a note from BCA Research geopolitical strategist Marko Papic. A primetime speech from the White House on Wednesday didn’t exactly soothe concerns; Brent crude oil prices jumped 7% on Thursday to $108, while US crude jumped 11% to $111. 

JetBlue has raised its baggage fees to counter higher costs, while flag carrier Korean Air told staff it must shift to an “emergency” mode; fuel typically accounts for 30% of carrier costs, and the shortage could double that. Overall, data from the flight information group OAG shows the average airfare over the past week was $465, up about 25% year-over-year and at least a seven-year high.

The US just so happens to be sitting on a massive jet fuel stockpile, but experts aren’t sure there’s enough to go around:

• As of last week, US jet fuel stocks reached a five-year high of 27.5 days’ worth of fuel, Hartree Partners commodities trading strategist Edward Morse told The Financial Times. But “it’s not going into exports, it’s staying here [in the US], and that’s because users want it,” Hartree added.
• Europe, meanwhile, has enough jet fuel to last through April, Bloomberg reported Wednesday, but the industry could encounter shortages in May if the situation continues.

Don’t Worry, Darling: The US Global Jets ETF, which holds shares in dozens of global airlines, has tumbled more than 10% in the past month. Among major US airlines, Southwest has been hammered the worst, down more than 22% in the past month, while Delta, which reports quarterly earnings next week, has actually climbed nearly 4%, thanks to its pricing power. Meanwhile, shares of Darling Ingredients, which turns food waste and animal fats into various energy sources, have soared more than 70% this year. When life gives you garbage and a global energy crisis, you play the hand you’re dealt.