Asian aviation sees blue skies, offers ray of hope for jet fuel

Singapore — Asia's aviation sector is recovering, with regional flights gradually taking to the skies again and providing the promise of strengthening jet fuel prices, but financial headwinds and fears of a second wave of coronavirus infections could again ground prices, traders said this week.

The FOB Singapore jet fuel/kerosene price plummeted by almost 84% since the beginning of the year to a record low of $13.06/b on April 22, but has rebounded since then, gradually climbing to $23.68/b at the 0830 GMT Asian close Wednesday, marking a 81% spike from the trough, S&P Global Platts data showed.

The strengthening was also reflected in the derivatives market, where the June/July Singapore jet fuel/kerosene swap spread rose from a record low of minus $3.90/b on April 30 to minus $2.04/b Wednesday.

Similar strength was reflected ahead as well, for the Singapore jet fuel Q3/Q4 spread, which rebounded from an all-time low of minus $6.33/b on March 31 to minus $4.16/b at the Asian close Wednesday.

Picking up pace

As local governments begin to ease containment measures with safety precautions in place, a growing number of airlines around the region are planning to restore some capacity, helping to bolster sentiment in the jet fuel market.

China Eastern Airlines, the country's second-largest domestic carrier, is planning to resume 70%-80% of local flights by end-June. The domestic aviation sector resumed 208,700 flights in April, a 6.5% jump month on month, the Civil Aviation Administration of China reported.

Hong Kong's Cathay Pacific and regional carrier Cathay Dragon plan to bump up flight capacity to 5% from the current 3% from June 21, restarting between three to five weekly flights to several destinations in Europe, the US and Asia and increasing daily flights to Japan, South Korea and Southeast Asia.

AirAsia in late April resumed domestic flight operations in Malaysia, while Thailand's AirAsia and Lion Air also restarted domestic flight operations between Bangkok and Chiang Mai. Vietnam Airlines will resume all domestic flights in June. The airline is currently operating 17 domestic flights a day, which will increase to 23 flights a day by the second half of May.

S&P Global Platts Analytics expects global commercial air traffic to slowly recover. A recovery in non-commercial traffic is more apparent, with commercial traffic still down 68% from pre-crisis norms, but the impairment has lessened from the 77% seen in mid-April, it said in a report.

Non-commercial traffic has risen irregularly, and levels are down 30%-35% from pre-crisis levels. Total global flights are down about 55% from pre-crisis norms.

Headwinds

That said, market participants warned of financial headwinds stemming from the pandemic and its financial implications on the aviation sector.

"I think a rebound in [jet fuel] prices is normal, given how much it had fallen previously, but that said, I think we must not be complacent and be prepared for a second wave of bearishness," a Singapore-based refining source said Tuesday.

"Wuhan recently announced a new [COVID-19] cluster, and the last thing we need is another series of lockdowns and travel restrictions yet again," the source added

Australia's Virgin Airlines had buckled under the pressure of the pandemic and in late April announced voluntary administration, equivalent to Chapter 11 bankruptcy in the US.

The Japan Airlines group late April reported a 64.6% year-on-year plunge in net profit to Yen 53.4 billion ($500 million) for fiscal 2019-2020. Its latest capacity reduction hit 95% for international operations and 70% for the domestic sector.

Singapore Airlines Group—which includes Singapore Airlines, regional carrier SilkAir and budget carrier Scoot—expects a full-year loss despite a promising nine months for the 2019-2020 financial year. If that materializes, it will mark the first full-year net loss in its 48-year history.