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23 Dec 2024
05 Dec 2024
10 Nov 2015 | 10:31 UTC — Insight Blog
Featuring Matt Kohlman
Jet fuel may be half the price it was a year ago, but airlines used to so many sad-song years aren't taking anything for granted. Just look at the semi-annual jet fuel forum held in always-sunny Cancun last week.
Where it was raining.
Attendance is booming, past 500 people, but many were suppliers of various sorts. Organizers said a fewer airlines were present, possibly because it's harder for management to sanction travel to a resort hot spot like Cancun. (Where it rained a lot, keeping everybody indoors and working hard. I swear.)
But perhaps it's because they're still very budget conscious. I had two airline members say they wouldn't have come if their own airline didn't fly into Cancun and have space for them to fly free. Others said just like in recent years, their airlines have fewer people attending and they are required to stay in cheaper hotels near the International Air Transport Association industry event. They worry about $10 meals being too high for their expense reports.
It seems these remain trying times for airlines, despite record quarterly and yearly profits in the billions of dollars for the biggest airlines.
This is also despite their No. 1 cost dropping in half on the spot market — US Gulf Coast jet fuel fell to a 5 1/2-year low of $1.25/gal on Aug. 24, 2015, compared with $2.88/gal a year earlier, according to Platts data. Prices have been hovering just above that low since.
Scratch that. Jet fuel is no longer their biggest cost. It was one-third of expenses a year ago, but now is down to a quarter or a fifth for many of them. Labor has retaken the top spot.
In one of the more interesting presentations, Delta's senior VP of fuel optimization told the industry group that his company was on track to make a $300 million profit this year on an East Coast refinery they bought in 2012. A refining arm of an airline — once considered a historically risky financial venture — is making more money than most airlines in the US did three to 10 years ago. Perhaps even in total.
Another presentation talked about an XML-based standardized jet fuel tender process they're trying to create for the industry, rather than individualized paper methods today. They estimate it will save airlines $15 million a year. It's another example of how they're looking under every seat cushion for savings and efficiencies.
IATA chief economist Brian Pearce showed a slide highlighting higher load factors and lower breakeven points that airlines need for their load factors. Basically, the number of people filling seats is much higher, but the number of people needed to fill seats for a profit is much lower.
Pearce said this is the first year ever that returns on invested capital will be above expectations for the global airline industry — considered a normal trend in other industries.
The word "efficiency" is heard so much that it's easy to see airlines are not comfortable in betting that lower jet fuel prices are here to stay.
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They're still in the early to mid-innings of a big fleet replacement likely to make planes burn on 10-20% less fuel. One technical person — the conference has as many technical sessions as commercial ones — said the new planes have new engines with some of the outside gear box fitted inside the engine instead to deliver up to 10% better fuel economy.
They're also looking at replacing bigger planes on routes instead of adding planes, routing into more fuel-efficient flight paths, economic tankering to fly full into a high-cost airport, and removing any extraneous weight from planes.
One speaker said planes are just like people — they slowly pack on the pounds every year without realizing it. He said airlines now often go through airplanes and remove unnecessary weight. A participant later joked that they should add reward miles to travelers who agree to lose weight before their flights.
It won't go that far (I think), but the basic gist is airlines are doing everything they can to keep costs down, run more efficiently and do more with less after more than a decade of bankruptcies, mergers, recession-tinged travel declines, exploding jet fuel bills and much more. One year of declining jet fuel prices — no matter how sharp — seems unlikely to change that equation.
There were a couple of sunny days in Cancun, by the way. But the rains that followed reminded participants that they always have to keep an eye on the weather.
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