Jet fuel prices have steadily declined over the first quarter, after a strong start to 2023, according to the IATA Jet fuel price index.
Amidst weakening prices, G7 countries have renewed their calls for more aggressive decarbonisation of the international aviation sector, while suggesting a switch to sustainable fuels would be key to success.
Currently, the price is being kept down due to a combination of excess supply due to a production hike at the start of the year, when expectations were that aviation fuel demand would soar, and stagnant demand. In hindsight, jet fuel demand has been stable however it is not in line with the supply surge.
For instance, the US Transportation Department said that in February U.S. airlines used 1.14 billion gallons of fuel, 5.4% less fuel than in January 2022 and 11.4% less than in pre-pandemic February 2019.
On the other hand, according to S&P global, the momentum in jet fuel/kerosene demand in the Middle East is likely to sustain in the second quarter as the aviation sector continues to normalise. Dubai International Airport flights surpassed pre pandemic levels in March.
While there is a current downwards trend in Jet fuel prices in the short to medium term, looking beyond that, the cost of decarbonising air travel is likely to push up ticket prices and put some off flying and in turn, reduce belly freight capacity.
According to Sustainable Aviation*, Sustainable aviation fuel (Saf) would be a key part of the industry’s “journey to net zero”, accounting for at least three quarters of the fuel used in UK flights by 2050.
Saf is produced from sustainable sources such as agricultural waste and reduces carbon emissions by 70% compared with traditional jet fuel.
Fuel is airlines’ second-biggest expense after labor, but major U.S. airlines do not hedge against volatile oil prices like most European airlines. Currently, Saf is several times more expensive to produce, therefore the costs would have to be passed on. Thus, the effort to reach net zero will surely drive up airlines’ operation costs.
Heathrow Airport’s director of sustainability said this “green premium” will have “some impact on future demand” for air travel.
For now, some market sources said lower outright jet fuel/kerosene prices could spur buying activity. While jet fuel prices substantially declined at the onset of the Covid-19 pandemic, they bounced back sharply afterward because of inflationary pressures. This volatility, along with the push for greener fuels makes the long-term planning of air operations more complex.
*Sustainable Aviation is an alliance of companies including airlines such as British Airways, airports such as Heathrow and manufacturers like Airbus.
Author: Jenan Hasan
Source: Ti Insights