Airline Travel and Jet Fuel: New Records Hide Tumbling Consumption

Matthew Carr By Matthew Carr, Emerging Trends Strategist, The Oxford Club

Market Trends

It’s June. That means there are a couple different trends underway.

Most notable – and one many investors are familiar with – is the “Summer Lull.” This is a time when the markets often trade sideways. A lot of ups and downs… but typically no real surges.

And that’s caused by our other trend: summer vacation.

The kids are out of school, and families pack up to head on summer adventures.

This affects fuel prices. Gasoline hits a peak, and crude is often buoyed by a significant uptick in demand following the maintenance season in the first quarter.

And right now, U.S. refineries are operating at more than 94% capacity. That’s good for a utilization rate increase of more than 10% from the lows in February.

A lot of vacationers head off to their destinations by car or RV. But some take to the skies.

I travel a lot. But I’ll be honest: I’m a cursed traveler.

I’m practically guaranteed to have my flight severely delayed or canceled. I can proudly say I’ve been stranded in airports (and even a couple of train stations) all over the world. In fact, because of my jinx, most people don’t like to travel with me.

There was a time it used to irk me. But I embraced it long ago. I always pack an extra book and snacks in my carry-on. I prepare for being stranded for the long haul.

Not everyone is as gracious. And I’ve seen my fair share of passenger freakouts over the years.

Airline travel isn’t as romantic as it once was. There was a time when people dressed up and passengers were actually given meals on flights.

But despite the dwindling formality, airline travel hasn’t become more laid-back.

Today, it can be a lot more stressful… for not just the passengers but the airlines themselves.

Obviously, the industry has had to tackle some bad press in recent months. United Continental’s (NYSE: UAL) overbooking fiasco is the first situation that comes to mind.

In 2016, U.S. airlines carried 20% more passengers than they did a decade ago…

In fact, airlines carried a record 822 million passengers last year.

After surviving a tepid period following the September 11 terrorist attacks and the financial recession that began in 2008, airlines have been reporting record profits.

However, jet fuel consumption in the airline industry has declined 11% since 2007. And that’s despite the fact that it increased 3% in 2015 and 2% in 2016 – the two highest annual increases since 2004.

The collapse in jet fuel prices has been a boon for the airline industry. Jet fuel peaked in June 2008 and recovered from 2009 to 2014. But it’s never come back close to its 2008 highs. And since June 2014, the price of jet fuel is down 47.6%.

Today, fuel per gallon accounts for a bit more than 15% of airlines’ operating expenses, according to the Airlines for America Passenger Airline Cost Index.

And last year, the U.S. passenger airline cost per delay fell 4.4% to $62.55 per minute. The largest declining factor was fuel, which tumbled 18.5%.

So we have a situation where airlines are posting record profits and carrying a record number of passengers… but consumption is on a long downward trend.

Some investors might be scratching their heads as to why this is happening. Here’s the answer…

First, the total number of flights has fallen almost 20%. To cut down on costs, airlines took a very direct approach: They reduced the number of flights.

This not only helps boost ticket prices, as demand for air travel increases, but it also boosts the revenue per passenger since planes are closer to or exceeding full capacity.

Second, airlines have invested in planes that are more fuel-efficient.

From 1968 to 2014, the average fuel burn for new commercial aircrafts declined 45%. Since 2010, the goal has been to increase fuel efficiency by 1.1% per year. And it’s now projected that aircrafts in 2020 will be 40% more fuel-efficient than they were in 2000.

Both were byproducts of high fuel prices following the financial crisis and the OPEC-fueled crude collapse from 2014 to early 2016.

This illustrates how investors can be misled into believing that a record number of passengers also means record fuel consumption.

That’s not going to be the case.

Good investing,

Matthew