A stunning rise in the cost of jet fuel has sent airfares soaring, and industry experts say they are likely to go higher. For now, though, travel-starved consumers seem more than willing to pay up.
Jet fuel prices have settled somewhat since Russia’s invasion of Ukraine sent them skyrocketing last month, but the market remains extremely volatile. The problem is particularly severe in New York, where the cost of the fuel rose about fourfold to just over $7.50 a gallon before dipping back to $5.30 in recent days.
Supply is broadly constrained and prices have spiked across the country. The Energy Department this week said that the inventory level for East Coast jet fuel stood at 6.5 million barrels, the lowest since the agency began keeping track in 1990.
“Jet fuel has made the most parabolic move I’ve ever seen for any transportation fuel,” said Tom Kloza, global head of energy analysis at Oil Price Information Service. “It’s just insane.”
The surge in prices has implications not only for airfares but also for the already high costs of global shipping. On Wednesday, for example, Amazon announced plans to impose its first “fuel and inflation surcharge” for sellers whose goods it stores and delivers.
Airlines have been able to pass on some of their added fuel expense to consumers, many of whom are more than eager to travel after being denied the opportunity for two years.
At the start of this year, the average cost of a round-trip domestic flight was $235, according to Hopper, an airfare-tracking app. Since then, ticket prices have risen 40 percent, to $330. Adit Damodaran, an economist at Hopper, which tracks prices for flights and hotels, said the company expects another 10 percent rise, to $360, by the end of May, before prices drop again in the summer.
“Not only are the current prices that travelers are paying extremely high compared to historic price data, but the rate of increase has also been particularly steep since January,” he said.
In addition to the rising cost of jet fuel, Mr. Damodaran said, the surge in airfares can also be attributed to typical seasonal patterns and the fact that demand was suppressed at the start of the year as the Omicron coronavirus variant spread.
Some airlines have also cut flights in response to persistent staff shortages, creating greater competition and driving up fares for the flights that remain.
Carriers typically pass on to consumers as much as 60 percent of a volatile rise in the price of fuel, experts said, a process that usually takes months. This time, however, the industry has been able to pass along costs more quickly, in large part because of high demand and a shift in consumer behavior during the pandemic toward buying tickets closer to the date of travel.
“We are successfully recapturing a significant portion of the run-up in fuel,” Ed Bastian, the chief executive of Delta Air Lines, told investment analysts and reporters on a call on Wednesday. “This is occurring almost in real time, given the strong demand environment.”
Mr. Bastian said that Delta, the first major carrier to report financial results for the first three months of this year, had seen a strong rebound so far and that it was preparing for a robust spring and summer.
Delta paid an average price of $2.79 per gallon of jet fuel in the quarter, up 33 percent from the last quarter of last year. The price included a saving of 7 cents per gallon from the airline’s oil refinery outside Philadelphia. Delta said it expected the price of fuel to rise another 15 to 20 percent over the next three months, to between $3.20 and $3.35 per gallon, a range that includes an approximately 20-cent savings attributable to the refinery.
Prices for jet fuel, like gasoline and diesel, generally go up and down with crude oil.
In February, American Airlines reported that the price it paid per gallon of jet fuel had risen more than a third over the past year, from $1.48 in 2020 to $2.04 in 2021. At the time, it said that each sustained one-cent rise in the per-gallon price would increase its fuel expense for 2022 by about $40 million. This week, American estimated that it had paid $2.80 to $2.85 per gallon in the first quarter of the year.
Rising fuel costs and fares seem to be doing little to dissuade consumers. Mr. Bastian said Wednesday that March was Delta’s best sales month ever, beating a record set in 2019, despite having 10 percent fewer seats available. That comes as fares for domestic flights were up about 20 percent across the board between March 2019 and March 2022, according to an analysis by the Adobe Digital Economy Index, which draws on online sales from six of the top 10 U.S. airlines.
“We’ve all been stuck at home for two years, and I think now that we have the opportunity to get out, there’s going to be a lot of willingness to pay,” said Joe Rohlena, lead airline analyst for Fitch Ratings. “If it remains expensive to travel further out, then you may see that kind of willingness to pay higher ticket prices back off.”
The Russia-Ukraine War and the Global Economy
Shortages of essential metals. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.
Financial turmoil. Global banks are bracing for the effects of sanctions intended to restrict Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.
The pandemic severely diminished air travel, so it was no surprise that jet fuel prices plunged even more deeply than those for gasoline two years ago. In most of 2020, as the pandemic throttled transportation of all kinds, American refineries slashed their output of jet fuel — usually a reliable profit-maker — by as much as a million barrels a day.
But even in a business as cyclical as refining, the recovery for jet fuel has been remarkable.
Richard Joswick, head of global oil analytics at S&P Global Commodity Insights, said pipeline flows of jet fuel, though increasing, had not kept up with demand.
A few shipments that were supposed to go to New York this month were redirected through the Panama Canal to Los Angeles as California fuel prices began to climb. Other fuel was redirected to Baltimore and Washington as supplies there ran short.
“It’s like a water balloon — you squeeze it one place, it bulges out someplace else,” Mr. Joswick said.
Experts are predicting price spikes in the Rocky Mountain region and the West Coast as the summer travel season reaches its peak in July and August. Stockpiles are also low elsewhere in the country, with many airports stocking only a three-day supply, jeopardizing schedules if there is a bad-weather event like a hurricane.
Refineries produce jet fuel from the same batch of oil as diesel, and refineries are producing as much diesel as they can. Europe has curtailed its purchases of Russian diesel since the invasion of Ukraine, and instead imported more diesel from the United States, even as truck and railroad traffic has recovered here.
Refinery closings in Europe and North America in recent years have been another contributing factor. Since January 2019, refinery capacity has declined 5 percent in the United States and 6 percent in Europe, according to Turner, Mason & Company, a consulting firm in Dallas.
John Auers, Turner, Mason’s executive vice president, said it was hard to produce more jet fuel when the market was demanding more diesel, and equally hard to produce more diesel when the market was demanding more jet fuel. “People are traveling, driving and flying, and there is more commerce, so we’re going to have a tight market,” he said.
While the higher jet fuel costs have hurt airlines and consumers, refinery executives are happy for the extra business after two years of scant profits.
“Travel is up and demand for fuel is up, and with the Russian invasion impacting prices, fortunately or unfortunately, it bodes well for oil companies and jet fuel producers,” said Linda Salinas, vice president for operations at Texmark Chemicals, a Texas company that produces renewable jet fuel out of undistilled diesel made from used cooking oil and waste.