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U.S. Airlines Can Manage Higher Jet Fuel Prices For Now

CHICAGO (S&P Global Ratings) Sept. 15, 2023-- Although several U.S. airlines recently revised down their earnings expectations for third-quarter 2023, S&P Global Ratings does not anticipate a meaningful change to our forecasts. The airlines' revision comes mainly in response to higher-than-expected jet fuel costs, which have appreciated significantly over the past few months. Prices are close to $3.20/gallon (on average for the week of Sept. 3-9, 2023) due to higher crude oil prices and crack spreads--an increase of roughly $1/gallon since May.

In contrast, our fuel price assumptions for 2023 have remained higher and more conservative than the airlines' this year. Effectively, our forecasted credit measures incorporated a degree of downside cushion to withstand the recent appreciation in prices. As such, the recent uptick in fuel prices has an overall limited effect on our estimates for now. Passenger demand also remains favorable following a very strong summer travel season.

Still, sustained, higher jet fuel prices remain a downside risk to our forecasts, particularly if not accompanied by higher fares. While we do not anticipate meaningful changes to our forecasts for large network carriers like American Airlines, Delta Air Lines, and United Airlines, we believe certain smaller, lower-cost carriers could face heightened pressure on profitability and credit measures. We view the demand environment for these airlines as relatively less favorable, due mainly to limited or no international exposure that is driving near-term growth for network carriers. While we apply similar fuel price assumptions across the U.S. industry, there is generally less capacity for lower-rated airlines to absorb higher-than-expected costs.

We rely on crude oil price forecasts from S&P Global's energy team and crack spreads imputed from certain industry sources for our fuel price assumptions. Airlines generally use forward curves that are heavily influenced by prevailing spot prices in their planning process. We acknowledge the unpredictability of fuel prices in our ratings, and our assumptions for 2023 are unchanged. Apart from Southwest Airlines, larger carriers typically do not hedge fuel; Delta generates a modest net benefit from its refinery sales.

We expect airlines will continue to mitigate the effect of higher fuel prices by passing on much of their exposure to customers. That said, this dynamic could become more challenging if fuel prices continue to increase from current levels given already high passenger airline fares (on a nominal basis) and slowing rate of expansion we assume for next year.

This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

Primary Credit Analyst:Jarrett Bilous, Toronto + 1 (416) 507 2593;
Secondary Contacts:Betsy R Snyder, CFA, New York + 1 (212) 438 7811;
Annapoorni CS, CFA, New York +1 (212)-438-0607;

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