The price of jet fuel has today hit a two year low. As the pressures of the coronavirus send economies plummeting, kerosene has become a whole lot cheaper for airlines to purchase. In fact, since the start of the year, prices have fallen by almost a quarter. But is this enough to save airlines who are struggling as the virus expands around the globe?
A silver lining for airlines
Over the past month, news of the coronavirus has been in the headlines daily. Today, the impact is being felt even more so as the outbreak begins to swell in nations outside of China. For airlines, it’s been a tough month, as demand for travel plummets and so do their stocks. The tough times look set to continue for some weeks yet.
However, there is a small silver lining in the midst of all the chaos. As global stock markets drop, commodities around the world are dropping in price too, including the cost of jet fuel. In fact, Cirium reports in Flight Global today that jet fuel has now reached a two year low, giving airlines a little breathing room during these difficult times.
ICIS, a corporate sibling of Cirium, told Flight Global that,
“European jet kerosene spot market continues to bear the brunt of coronavirus outbreak as flight cancellations are not only seeing reduced consumption rates but also inducing length in the market.
“While prices have continued on a downwards trajectory, staying at two-year lows, amid limited buying interest seen, additional supplies from the East are likely to hit the region, providing further downside.”
Right now, a tonne of jet kerosene arriving by barge in Europe is valued at around $501.75, according to ICIS. This valuation has dropped some $29.25 in just one week. At the beginning of the year, the same tonne of kerosene would have been valued at $660 per tonne.
Flight Global says a similar situation can be seen in the US. A barge of kerosene delivered to New York harbor would have cost around 171.50 cents per gallon four weeks ago. Today, that has dropped to 153 cents per gallon.
Could lower fuel prices be the reprieve aviation needs?
Airlines are painfully aware of fuel prices, with aviation fuel making up around 25% of the overheads of most carriers. For some, the cost of fuel can soak up as much as 32% of their overall costs, so in theory, a drop in this cost would mean a more profitable operation for the airline.
However, many airlines do something called ‘fuel hedging’. This allows them to buy forward contracts for fuel supply, at a previously agreed price. This helps mitigate fluctuations in the price of jet fuel, making it easier for airlines to budget. It’s a big win for airlines when fuel prices go up, but unfortunately also means they don’t benefit when the bottom drops out of the market.
With the coronavirus epidemic showing no signs of abating any time soon, fuel prices are expected to continue to trend downwards. Although suppliers in the Asian region are likely to look west to sell their products, as the economic shutdown in China has left limited opportunities to sell it there, overall this will only serve to drive prices even lower.
While a cut to one of aviation’s biggest overheads will bring a bit of welcome relief for airlines struggling with the impact of the coronavirus, it’s doubtful this will be enough to combat the drop in demand. Asian airlines, in particular, are facing up to trying to survive one of the worst years on record, and we’re still only in February. With the coronavirus only just starting to really affect European aviation, it remains to be seen if all the air carriers make it out the other side unscathed.