Air Travel Demand Drops as Carriers Trim Schedules to Mitigate Soaring Jet Fuel Costs
Iran’s shutdown of the Strait of Hormuz has sent jet fuel prices soaring as supplies fall. But one trend is mitigating fears of shortages: Jet fuel demand is falling even faster.
That’s because airlines – especially in Europe and Asia – are cutting flights and reducing consumption in the face of rising fuel costs.
“This is alleviating some of the stress in the system,” said Marco Felsberger, a supply chain consultant in Vienna.
Airlines around the world, including KLM, Lufthansa and Air Canada, have reduced schedules and raised fares as jet fuel prices have doubled, outpacing the gains in crude since the start of the U.S.-Israeli war on Iran on Feb. 28. The waterway along Iran’s coast normally bears 20 per cent of the world’s oil and natural gas trade and 75 per cent of Europe’s imported jet fuel.
The global supply of jet fuel is at 88 per cent of prewar levels, while airlines’ schedules are at 82 per cent, and the gap is widening Mr. Felsberger said.
This has pushed back the expected date of European shortages to late June or July, he said, from the early June timeframe predicted recently by the International Energy Agency, which represents more than 30 member countries.
The jet fuel market accounts for about 7 per cent of global oil demand, and is particularly vulnerable to Middle East shortages, given the small number of alternative sources, the IEA said.
The near-complete closing of the strait has reduced supplies of jet fuel by 40 per cent, including seaborne supplies and reduced refinery output, said Karim Fawaz, a director in the energy and natural resources group at S&P Global Energy.
Refiners are scaling back output of gasoline, jet fuel and other products because of a combination of demand curtailed by high prices and disruption in the availability of crude, Mr. Fawaz said by phone.
In Canada and the U.S., the crisis in oil and refined products is centred on prices. Elsewhere, the pinch is also being felt as a shortage, including in parts of Italy.
“Different regions are facing different types of challenges,” Mr. Fawaz said. “In North America it would be price, much more so than physical availability. In parts of Asia and Africa, it’s happening more on the availability side.”
Christopher Anderson, a professor and airline expert at Cornell University in Ithaca, N.Y., said U.S. airlines are cutting routes made unprofitable by higher fuel costs, but are offering the same number of flights as last year, with planes being fuller, on average.
The problem is fuel prices rose quickly after the war started, while airlines have only raised fares gradually, and are still flying passengers who paid for tickets months before the oil crisis.
The doubling of fuel prices means it costs an additional US$8,000 to fill the fuel tanks of a typical Boeing 737, Prof. Anderson said. This is bearable at today’s higher airfares, but a sure money loser if passengers bought their tickets at the lower prices months ago, he said.
Spot prices for jet fuel on the U.S. Gulf Coast were around US$2 a gallon in January and are now US$4.11, according to the U.S. Energy Information Agency.
Rystad Energy analyst Susan Bell said it will take 60 days for the jet fuel market to return to normal after the Strait of Hormuz reopens. “Airlines know this,” Ms. Bell said. “They are cutting flights and loading surcharges of $50 to $60 per short-haul ticket, and those prices will be sticky long after tensions in the Middle East ease.”
The Paris-based IEA is calling on people to fly less often, and for governments to limit air travel for employees. Governments in Thailand, Egypt, Pakistan and Vietnam have taken steps that include introducing work-from-home policies and reducing or stopping air travel for public servants.
To give airlines another fuel option, the International Air Transport Association, the trade association for airlines, has issued guidelines to members on switching to or mixing in a different strain of kerosene, known as Jet A. That’s the variant mainly used in North America, which has a higher freezing point than Jet A-1, the fuel used in Europe and most of the world.
“This could give airlines facing a possible shortfall in fuel supply more options,” Stuart Fox, IATA’s director of flight and technical operations, said in a statement. “Where applied, it will allow European carriers and airlines from other regions to operate in the same way as many in Canada do, where they switch between Jet A and Jet A-1 as part of seasonal operations.”
With files from Jeffrey Jones
This article was first reported by The Globe and Mail
