Jet Blue sees higher Q4 demand for air travel despite rising coronavirus cases

Jet Blue expects a pick-up in air travel demand in the fourth quarter, helped by an uptick in bookings for end-year holiday travel despite the rise in coronavirus cases, a trend which bodes well for increasing jet fuel demand and refinery utilization.

"For the fourth quarter, our current planning assumption is for capacity to decline 45% year-over-year given our current expectations for improved bookings," said Joanna Geraghty, Jet Blue's chief operating officer on the company's Oct. 27 third-quarter results call.

This compared with year-over-year capacity declines of 58% in the third quarter and 85% in the second quarter as Jet Blue works to restore consumer confidence in safe air travel.

Air transportation has been the hardest hit by the lack of human mobility imposed as a result of government lockdown measures around the world to prevent the spread of the coronavirus.

Business travel has been severely curtailed and leisure demand has been hampered, cutting global jet fuel demand dramatically from about 9 million b/d in January 2020 to about 3 million b/d in the second quarter of 2020, S&P Global Platts Analytics data shows.

But as lockdowns are eased demand is growing. In the US, Energy Information Administration data shows jet demand, which fell to 596,00 b/d in May, is has climbed 57% by October from the lowest point in the second quarter as airlines start to increase flights despite coronavirus fears.

"And although there is still a lot of uncertainty around the evolution of the coronavirus, we are starting to see the booking curve extend slightly into the up into the Thanksgiving and December holidays," Geraghty said.

Regional reopenings

New York-based Jet Blue serves some New England destinations, where demand was helped slightly by rollouts of testing options to "help travelers manage through quarantines" by Massachusetts and Connecticut. But the shutdown of tourist spots in places like New York City continues to keep leisure demand weak.

"Our Northeast geography continues to be disproportionately impacted," Geraghty said, adding "we continue to see demand recovering quickest to Latin, Caribbean, and Florida destinations."

Geraghty said that by the end of the third quarter 20 of its 35 foreign destinations in the Caribbean and Latin America were open to US fliers, while the removal of the quarantine measure between New York and California increased flights between the two regions "modestly."

For the week ended Oct. 18, US domestic flights were at about 70% of their pre-pandemic norm, according to Platts Analytics.

Refiners are seeing increased demand for the jet fuel they produce, according to Valero Energy executives.

"So far in the fourth quarter, the airline data is talking a 17% increase in passenger headcount, which is encouraging," said Valero's chief operating officer Gary Simmons on the company's Oct. 22 third-quarter results call, adding fuel nominations by airlines Valero serves are up.

Valero, like many other refiners, had cut back on jet production as demand for air travel fell, blending any jet produced at its plants into the ULSD pool. The increase in demand has raised the price enough to allow Valero, and other refiners to stop that practice.

"The thing you would like to see in the market is jet trading around RIN-adjusted parity to ULSD, which allows us to pull those molecules out of the diesel pool, and you will start to see that result in higher refinery utilization," Simmons said.

So far in the fourth quarter, US Gulf Coast jet is trading at 1.53 cents/gal RIN-adjusted parity premium to USGC ULSD, compared with the third quarter's 2.21 cents/gal discount, Platts assessment data shows.

For the week ended Oct. 18, USGC RIN-adjusted jet held a 2.68 cents/gal premium over ULSD.

Rebuilding confidence comes at a cost

According to Johns Hopkins Coronavirus Resource Center, new US cases of the coronavirus rose by 40% over the past 14 days, primarily in the upper Midwestern and Rockies region, outside of Jet Blue's orbit.

Jet Blue CEO Robin Hayes said on the call that even as cases have risen across the country the airline has seen an increase in bookings.

"There's been a big pent up demand for travel," he said, adding students coming home for Thanksgiving are making him "cautiously optimistic" of the increased travel trend.

Hayes noted that about 28 or 30 states had relatively low infection rates of about 1.2%. This low rate, along with coronavirus safeguards put into place to lure travelers back to the sky, have contributed to rebuilding traveler confidence.

However, growth in jet fuel demand could be stymied by the modifying of coronavirus protocols put into place by Jet Blue and other airlines, which increase the passenger load.

Jet Blue, which had blocked the use of the middle seat as a way to increase distance between passengers, lifted that restriction in October and as of December 1 is keeping plane capacity just below 70%, Geraghty said.

"The middle seat block was all about rebuilding consumer confidence in travel," she said, adding that longer-term it is not sustainable.

Jet Blue's fourth quarter planning forecast assumes a 65% decline in revenue year-over-year compared with the 76% year-over-year revenue in the third quarter and 90% in the second quarter, she said

Jet Blue's third quarter revenue per seat mile, or RASM, averaged 7.12 cents, down over 44% from the year earlier quarter.

"We will continue to increase our loads longer-term based on what recent safety studies have come out saying that the aircraft cabin is inherently safe," she added.