Rising jet fuel price puts extra pressure on airfreight sector

Date: Monday, April 19th, 2021
Source: FreightWaves

The rising price of jet fuel this year is further burdening companies with airfreight shipments and could reduce limited capacity if passenger airlines opt to scuttle cargo-only flights temporarily operated since the start of the pandemic, industry officials say.

The average price for jet fuel closed Friday at $66.90 per barrel or $1.59 per gallon, more than double the cost (70 cents a gallon) to refuel an aircraft 12 months ago and nearly as expensive as before the global crisis, according to energy information provider Platts. Spot prices for U.S. jet fuel on Friday were $1.68 per gallon, Argus Media’s index showed.

The price of Brent crude oil averaged $65 per barrel in March, up $3 per barrel from February and $33 per barrel from March 2020 as demand for fuel increases in countries reopening from lockdowns amid production limits set by OPEC and other oil producers. It finished Friday trading at $63.20 per barrel.

Airline industry officials say higher prices for fuel, which accounts for about a quarter of operating costs, will make it more difficult for airlines to return to cash-positive operations. The industry lost $118.5 billion last year and sharply reduced flight operations to slow the run on cash as customers avoided travel because of health concerns. International traffic remains almost 90% below pre-pandemic levels, and airlines borrowed heavily to remain in business.

The ripple effects from higher fuel prices are also reaching cargo owners that use airlines to move goods. Many airlines in the past 90 days have added fuel surcharges to their bills and will have to assess how long they can continue to operate repurposed passenger aircraft for dedicated cargo routes.

“If it continues, this upward trend starts to make the economics of running passenger aircraft with cargo in the operations slightly more challenging because they’re not freighters. You can’t get the full utilization or payload that a freighter has,” Glyn Hughes, the new director general of The International Air Cargo Association, said during a recent media briefing. “With the fuel price at low levels it was quite economic to do so, but that will be an economic challenge going forward.”

Ultra-low fuel prices helped airlines market aircraft as auxiliary freighters. Passenger airlines deployed more than 2,500 idle aircraft for cargo operations last year to help shippers transport their products when they faced a sudden drop in available capacity. More than 50% of global airfreight typically moves in the lower deck of passenger aircraft. High yields convinced airlines to shift some assets to all-cargo operations, even though passenger aircraft hold fewer goods by volume than pure freighters that can load heavy containers on the main deck.

“Fuel is now a serious cost. We need to once again pay close attention to it because it’s definitely driving up the cost of round-trip operations,” Neel Jones Shah, the global head of airfreight at freight forwarder Flexport, said in an interview. “And it does make the preighters [passenger freighters] that much tougher to justify. At 45 to 60 cents a gallon, those preighters could be justified quite easily. At $1.60 a gallon it’s a completely different calculus.”

The mini-freighters are still going strong because yields remain extremely high. Freight forwarders are desperate to find air space with cross-border trade surging and capacity still 15% below pre-crisis levels. Airfreight volume grew 9% in February compared to February 2019, and by all accounts the rate of growth has picked up since then.

It’s difficult for airlines to make money on passenger freighters at rates below $6 to $7 per kilogram, because they tend to only have strong revenue in one direction, according to analysts.

Rates are above that range on key trade lanes. Competition for space is fierce and cargo buyers, like Flexport, are paying three to four times the normal price to book space. Renting entire cargo planes has become a common practice for logistics companies to secure capacity for their customers, but aircraft are going like hotcakes. Cargo charters on popular trade lanes are going for $1 million one way, logistics professionals say.

Jones Shah, a former cargo chief at Delta Air LInes (NYSE: DAL), said each carrier has its own methodology for allocating costs between passenger and cargo divisions, which makes it difficult to generalize on the breakeven point for cargo-only operations across the industry.

“But when you look at it on a fully loaded cost basis, the preighters become pretty tough to operate” if yields go down and fuel prices stay where they are or kick up more, he said.

Fuel surcharges

Meanwhile, many carriers have announced fuel surcharges on cargo, adding to the high freight bills for retailers, manufacturers and food producers. Emirates is charging between 3 cents and 7 cents per kilo depending on the length of haul. Hong Kong is allowing carriers to charge between 5 cents and 19 cents per kilo at current oil prices. Hawaiian Airlines on Thursday will initiate a fuel surcharge on loose cargo of 26 cents to 55 cents per pound depending on whether it moves on U.S. or international routes, with a $10 to $15 minimum.

The surcharges are relatively low by historical comparisons, but if oil prices were to hit $75 to $80 per barrel, that would force airlines to put fuel surcharges between 50 cents and 60 cents per kilo, and even up to 80 cents, Edward DeMartini, Kuehne + Nagel’s vice president of air logistics business development for North America, said during a recent customer webinar.

The direction of oil and aviation fuel prices will depend on several variables, including the global recovery and the extent to which leisure travel business picks up for airlines this summer.

Meanwhile, the Organization for Economic Development is forecasting the global economy will growth 5.6% in 2021, with various estimates for U.S. economic growth as high as 8%. With more commuting, long-distance travel and manufacturing activity, oil consumption is expected to increase. But last week the Organization of Petroleum Exporting Countries and other partners agreed to increase output by 1.5 million barrels per day by July.

But the coronavirus crisis and pace of global vaccinations still cast uncertainty over any forecasts. Europe, Brazil and portions of the U.S. are dealing with large outbreaks again as new COVID strains take hold.

Goldman Sachs is forecasting Brent Crude prices will hit $80 per barrel this summer on strong demand.

Morgan Stanley’s commodity desk expects crude oil prices to reach $70 per barrel by the third quarter but then settle at $55 to $60 per barrel in 2022. In addition to a moderate long-term forecast for oil, jet fuel price should be tempered in the near to medium term because of substantial slack in the U.S. refining system, the analysts said.



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