The price of jet fuel, the main cost component for airlines, has soared to its highest level since the COVID-19 pandemic began. According to data from the International Air Transport Association (IATA) and S&P Global Commodity Insights, jet fuel prices averaged $119.82 per barrel for the week ending Friday (August 4, 2023) compared to $97.78 for the week ending July 7, 2023. That’s a near 23% rise in less than a month.
The spike in jet fuel prices is partly driven by the rising crude oil prices, which have surpassed $80 per barrel in recent weeks. The oil market has tightened as major producers such as Saudi Arabia and Russia have maintained their output cuts of 1.3 million barrels per day (bpd). The demand for oil has also rebounded as the global economy recovers from the pandemic-induced slowdown.
However, the main factor behind the surge in jet fuel prices is the strong recovery of the air travel market in Asia Pacific, which accounts for about a third of the global jet fuel consumption. According to IATA, airlines in Asia Pacific had a 128.1% increase in June 2023 traffic compared to June 2022, the largest percentage gain on an annualized basis among global regions.
Asia Pacific leads the air travel recovery
The impressive growth of air travel in Asia Pacific is largely attributed to the successful containment of COVID-19 outbreaks and the rapid vaccination rollout in the region. Several countries in Asia Pacific, such as China, Taiwan, Singapore, and New Zealand, have achieved near-zero local transmission of the virus and have reopened their domestic and international travel markets.
China, the world’s largest aviation market, has seen its domestic passenger traffic surpass its pre-pandemic levels by more than 10%. The country has also resumed some international flights with countries that have low infection rates, such as Singapore, Thailand, and Vietnam. China’s Civil Aviation Administration reported that the country’s airlines carried 51.09 million passengers in July 2023, up 20.7% year-on-year and 8.9% month-on-month.
Other countries in Asia Pacific have also witnessed a strong recovery of air travel demand, especially for leisure and business purposes. For instance, Taiwan’s EVA Air and Japan’s ANA Holdings have launched a joint venture to operate flights between Taipei and Tokyo, two of the most popular destinations in Asia. The two airlines expect to carry more than 1.5 million passengers on this route annually.
Singapore, which has one of the highest vaccination rates in the world, has also reopened its borders to fully vaccinated travelers from selected countries, such as Germany, France, and Canada. The city-state has also established travel bubbles with Hong Kong and Australia, allowing quarantine-free travel for eligible passengers. Singapore’s Changi Airport reported that it handled 2.2 million passengers in July 2023, up 18% from June and the highest since March 2020.
Jet fuel demand outstrips supply
The robust recovery of air travel in Asia Pacific has boosted the demand for jet fuel in the region, which has outpaced the supply from refineries. According to S&P Global Platts Analytics, jet fuel demand in Asia Pacific is expected to reach 2.9 million bpd in August 2023, up from 2.4 million bpd in July and 1.6 million bpd in August 2022.
However, jet fuel supply in Asia Pacific is estimated to be only 2.6 million bpd in August 2023, up from 2.4 million bpd in July and 1.9 million bpd in August 2022. The supply shortfall is mainly due to the low refinery utilization rates and maintenance shutdowns in some countries, such as India, Indonesia, and Malaysia.
As a result, jet fuel prices in Asia Pacific have soared to record highs, reaching $125.25 per barrel on August 9, 2023, according to S&P Global Platts data. This is more than double the price of $61.63 per barrel a year ago and higher than the global average of $119.82 per barrel.
Jet fuel prices pose challenges for airlines
The soaring jet fuel prices pose significant challenges for airlines in Asia Pacific and around the world, as they erode their profit margins and increase their operating costs. According to IATA, jet fuel accounted for about 23% of airlines’ total expenses in 2019, before the pandemic hit.
Some airlines have tried to pass on some of the higher fuel costs to their customers by raising their fares or imposing fuel surcharges. However, this strategy may not be sustainable or effective in the long run, as it may dampen the demand for air travel and reduce their competitiveness.
Other airlines have opted to hedge their fuel purchases by locking in lower prices in advance. However, this strategy also involves risks and costs, as it may expose them to losses if the market prices fall below their hedged prices. Moreover, hedging may not be available or affordable for some airlines, especially the smaller or weaker ones.
Therefore, airlines need to find other ways to cope with the high jet fuel prices, such as improving their fuel efficiency, optimizing their route networks, and diversifying their revenue streams. Airlines also need to collaborate with other stakeholders, such as governments, airports, and fuel suppliers, to ensure the availability and affordability of jet fuel in the region.