Asian jet fuel recovery fizzles as airlines cut capacity amid omicron spike

Surging omicron coronavirus cases in Asia-Pacific have weakened jet fuel demand recovery in the region over the near term, as some airlines are forced to reduce flight capacity due to stricter mobility restrictions.

Asian countries have curbed movement in the fight against COVID-19, with sources saying that the absence of a strong domestic market for flight travel has curtailed demand recovery.

"You can see they're [international markets] actually recovering towards the end of the year [in 2021] in most markets, with the exception of the Asia Pacific region, which has continued to lag significantly behind the rest of the world and that's solely down to the travel restrictions that exist in that part of the world," International Air Transport Association Director General Willie Walsh said at a briefing Jan. 25.

"In 2019, the international travel within Asia, within that region, represented 13.3% of international travel, second biggest market after the within-Europe market ... In 2021 it was 1.5%," he said.

Asian jet fuel requires strong "travel arrangement" within the region to return to normal levels, a Singapore-based trader said.

"China can provide some support, as it has a huge domestic market, but because of their zero-COVID strategy, that's grounded a lot of planes and caused a lot of disruption to flights ... India is also able to support, but again, because of omicron, flight travel has been reduced," the trader said.

Australia's Qantas Group cut capacity after a recent decision by the Western Australian government to indefinitely delay reopening its borders.

The airline will reduce its planned domestic capacity by about 10% from Feb. 5 to March 31 as a placeholder, it said in a statement Jan. 21. The timing to reinstate Qantas' Perth-London route, which is currently operating via Darwin and was due to return to Western Australia late-March 2022, was also under review.

Indigo, India's low-cost carrier, was selectively withdrawing some of its flights on reduced passenger demand. "We anticipate that around 20% of our current scheduled operations will be withdrawn from service," Indigo said Jan. 9.

India's Directorate General of Civil Aviation Jan. 19 extended the suspension of incoming and outgoing international passenger flights to Feb. 28. The restriction does not apply to cargo operations and international flights under the existing bubble arrangements.

"Passenger travel remained extremely subdued throughout 2021, as a result of ongoing travel restrictions and strict quarantine requirements," Cathay Pacific CEO Augustus Tang said in a statement Jan. 24.

Hong Kong's flagship carrier flew 717,059 passengers during 2021, compared with 4.6 million passengers in 2020 and 35.2 million passengers in 2019, Tang said.

Future looks better

Some sources are hopeful that the aviation sector would recover over the medium to long run, as people's willingness to travel and easing movement restrictions lift travel prospects.

"It feels more like a seasonal downward capacity [change], as we are out of the peak holiday travel period, but I feel it's still a recovery trend for jet demand," a Singapore-based trader said.

Asia's kerosene/jet demand should pick up as the outbreak gets under control, JY Lim, advisor oil markets at S&P Global Platts Analytics said Jan. 26.

Platts Analytics estimates Asia's kerosene/jet demand to rise to 675,000 b/d in second-half 2022, from 185,000 b/d in the first half of the year. But 2022 demand on an average is likely to remain close to 23% below the 2019 level, Lim said.

"What has caused uncertainty in the minds of consumers has been the removal and reintroduction of restrictions and the uncertainty around what rules apply," IATA's Walsh said. "But I'm pleased to say that we are seeing some positive signs in relation to government actions on this side."

Supply fundamentals support prices

The FOB Singapore jet fuel/kerosene cash differential to Mean of Platts Singapore jet fuel/kerosene assessment climbed 6 cents/b to plus 76 cents/b at 0830 GMT Asian close Jan. 25, Platts data showed.

Prices were supported by reduced production, with China's recent announcement of a lower oil products export quota for 2022 likely exacerbating the tight supply.

Market participants said that there has been little incentive for Asian refiners to increase production due to factors, such as a weak regrade and a general lack of a strong domestic market that can support flight demand within the region.

"With the regrade at this level, it's not logical to produce jet at the expense of gasoil, unless they can't switch," an Asian refinery source said.

A weaker regrade should prompt refiners to produce more gasoil, another trader said.

"It's true, regrades are so weak so it's better that they [refiners] maximize gasoil, hence jet availabilities might still be tight," the trader said.