Over 75% of jet fuel prices, which absorbs approx. a third of all airlines’ expenses, are comprised of crude oil prices. The latter topped its maximum in March 2008, reaching almost 144 USD/bbl. But since then these prices have dropped by almost a quarter, providing industry players with the reason for optimism as concerns the opportunities for the market to become less dependent on OPEC. 

 

The USA and Iran are named as the main players whose future actions may return the world to the era of two digit fuel prices. Easing the sanctions against Iran has allowed the country to start officially selling its crude oil to Japan, South Korea, China, Turkey, India and Taiwan. The highly anticipated further cooperation with the Iranian government on its nuclear program may eventually lead to lifting the remaining financial and trade restraints thus opening the European and North American consumer markets to the state with the world’s third largest proven oil reserves.

In the meantime, following the successful development of the shale oil industry, the USA will boost its oil production rates and become the world’s largest oil producer as early as in 2015, reports the International Energy Agency. 

 

“The entire aviation industry is literally powered by oil. Despite the growing consumption in the emerging markets, the supply on offer has the potential to surpass the demand thus pressing the crude oil prices by another 10-15% in the following several years. As a result, the prices will fall below the psychologically significant point of 100 USD/bbl., and who knows, this might be a game changing development,” comments Tadas Goberis, the CEO of AviaAM Leasing. 

 

Despite the economic downturns, 9/11 and other disrupting factors, the global airline industry is expanding both quantity and quality-wise. Air carriers from Indonesia, China, the U.S. and other countries are ordering hundreds of new aircraft. Moreover, they are placing considerable efforts towards improving the load of their current fleet which has increased from approx. 65% in 1990th to almost 80% today. 

 

But along with the rising number of passengers, the costs incurred by airlines are also growing. For instance, IATA specialists claim that in 2013 the total industry bill for jet fuel increased to 214 billion USD.  However, the organization anticipates that due to lower fuel prices this year the same bill will shrink by 4 billion USD.  

 

Meanwhile, even a 10% decrease in fuel jet prices may lead to savings as high as 400-500 thousand USD per aircraft, or several millions for small and regional carriers per year. 

 

“Yes, major carriers own 50, 100, 150 and more aircraft, and for them even a 1% change in fuel price will lead to millions in profit or loss. However, large air companies have financial means and flexibility to minimize the potential negative impact of such fluctuations on their operational performance. Unfortunately, smaller carriers do not. Neither do they have the luxury to restructure their fleets every time oil prices go up or down,” shares the CEO of AviaAM Leasing Tadas Goberis.

 

What concerns renewals and structural changes to fleets it is worth noting that the listed prices for the upcoming Boeing 737 MAX are 10-15 million USD higher than the ones for Boeing 737 Next Generation. Moreover, even though in many cases the aircraft market price is 40-50% lower than the list price, the financial impact of every new aircraft on regional and small carriers is still substantial.

 

“Let’s face it, paying 40-50 million USD for a new aircraft is something not every carrier can afford. Of course, exceptionally high fuel prices are a strong incentive to make long-term investments in one’s fleet. However, oil prices are going down and show no signs of changing the direction. This will, eventually, allow carriers to enjoy almost the same savings on fuel bills which are possible by operating the upcoming generation of fuel-efficient aircraft. Meantime, if we take a look at the 5-7 years’ old aircraft available on the market today, their market prices are around 50% lower than those of the new machines, while remaining almost identical in fuel consumption rates.” comments Tadas Goberis – “In other words, lower fuel prices might spur up the demand for the current generation aircraft, both new and pre-owned. If the trend continues, many airlines will be able to achieve significant cuts in operational costs while maintaining or expanding their fleets with much more affordable solutions.”