Soaring Fuel Costs Trigger Airline Warnings

Airlines are warning of a disappointing third quarter in the wake of higher fuel costs courtesy of rising crude oil prices.

Southwest Airlines said its August bookings were at the low end of what it expected, and cut its expectations for revenue per seat mile. United Airlines and Alaska Air Group issued warnings of their own, as higher fuel costs came thanks to tightening supplies. According to an SEC filing by United Airlines, the cost of jet fuel has risen more than 20% since mid-July, with Q3 fuel costs averaging between $2.95 and $3.05 per gallon. This compares to UAL’s cost of between $2.50 and $2.80 per gallon in July. 

The speedy rise in crude oil prices, and the subsequent jump in jet fuel, left little time for airlines to compensate for the higher costs by revising ticket prices.

Nevertheless, Bank of America analysts had already cut price targets for the airline industry in the day prior, citing rising jet fuel costs, so stocks, including United Airlines, rose on Wednesday despite the warnings that profits could disappoint courtesy of the higher prices. Southwest Airlines stock, however, was down 2.60% by mid-day.

Last month, International Air Transport Association (IATA) and S&P Global Commodity Insights data showed that global jet fuel prices averaged $119.82 per barrel for the week ending August 4—a 23% rise over the previous month’s figures. It also compared to an average $85.55 Brent price, for a crack spread of just over $34. Still, global air traffic at the end of the second quarter this year was 94.2% of levels pre-Covid.

Jet fuel is considered a middle distillate—a petroleum category that has seen its U.S. inventories hover 15% below the five-year average for this time of year.

By Julianne Geiger for Oilprice.com