Eyjafjallajoekull's Effect on the Jet Fuel Market



Eyjafjallajoekull's Effect on the Jet Fuel Market
What did the worst disruption to European aviation since World War II mean for the jet fuel market?

The widely dispersed ash plume emanating from Iceland's Eyjafjallajoekull volcano brought much of Europe's commercial air traffic to a standstill. According to the International Air Transport Association (IATA), the ban on flights caused by the abrasive dust particle-laden cloud affected up to 1.2 million passengers a day and 29% of global aviation.

What did the worst disruption to European aviation since World War II mean for the jet fuel market?

"With aircraft not flying Europe has quickly become oversupplied with jet fuel," Simon Thorne, Platts Managing Editor of Oil, EMEA (Europe, Middle East, Africa), said last Thursday. "Suppliers are working hard with airlines to find homes for oil that should by rights have been consumed by now."

Thorne noted that between 90,000 and 150,000 metric tons of jet fuel are consumed on a given day in Europe; variables affecting consumption include the day of the week and time of year. He said that the crisis eliminated an estimated 550,000 tons – roughly 4.4 million barrels -- of jet fuel consumption. The eruption effectively destroyed 1.5% of global jet fuel demand.

The eruption effectively destroyed 1.5% of global jet fuel demand.

"The majority of excess jet fuel has rather been placed in floating storage awaiting ultimate discharge once the crisis passes and demand resumes," continued Thorne. "Neither of the options above will necessarily make money for a supplier, indeed losses may be incurred. But, that all being said, many suppliers are prepared to face some losses for the sake of their relationship with the airline."

Ultimately, jet fuel demand should be restored in relatively short order. A longer-term issue for airlines, however, has been the greater share of operating expenses they have devoted to buying fuel. Fuel cost is widely regarded as the largest single expense for an airline. As the graph below shows, that expense has effectively doubled within the past decade.

GRAPH: GLOBAL COMMERCIAL AIRLINES – PERCENT OF EXPENSES ON FUEL

According to the IATA, fuel represented 13% of the expenses incurred by global commercial airlines in 2001. That figure reached 33% in 2008 amid a period of unprecedented oil prices, and it has since hovered in the mid-20s. The IATA has estimated a 24% fuel cost figure for 2009. The organization has forecast that it will creep up to 26% this year. In the case of Europe, airline fuel costs have followed the global trend. In fact, as the pie charts below illustrate, fuel cost is the only expense that increased for European airlines from 2001 through 2008.

CHARTS (FOR 2001 AND 2008) – EUROPE PERCENTAGE SHARE OF AIRLINE OPERATING COSTS

At its height, the crisis from the volcanic eruption caused the cancellation of eight out of every 10 flights in Europe. On Sunday, April 18, there were only 5,204 actual flights as reported by The European Organisation for the Safety of Air Navigation (EUROCONTROL). In contrast, there were 24,965 flights the previous Sunday. The graph below compares the number of daily flights in Europe from April 14, the date of the eruption, through April 23 with the number of flights on the respective weekday of the preceding week.

GRAPH: THE DISRUPTION FROM THE ERUPTION

According to IATA, the situation cost the airline industry more than $1.7 billion in lost revenue over a six-day period. The Association of European Airlines (AEA) reported that Revenue Passenger km (RPK) – a measure of an airline's passenger traffic – declined by 32.6% the week of April 12-18 as airlines were forced to cancel thousands of flights. In contrast, during the week before the eruption, RPK increased by 2% from the previous week. In addition, AEA noted that Available Seat km (ASK) -- a measure of an airline flight's passenger capacity -- fell 34.7% from April 5-11 to the following week.

EUROCONTROL reported last Thursday that air traffic across Europe had returned to normal levels and that nearly all European airspace had become available.