Why changes in crude oil prices affect airline fuel costs

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Sep. 18 2014, Updated 8:00 a.m. ET

Why is fuel cost important?

Fuel cost is the largest cost component for airline companies. Since jet fuel is produced by refining crude oil, jet fuel prices follow the trend in crude oil price. The deviations could be the result of a changing refinery cost trend or a difference in demand for jet fuel and crude oil.

Due to rising crude oil prices, fuel cost as a percentage of total operating expenses has increased from 14% in 2003 to 30% in 2013. In 2013, Delta’s (DAL) fuel cost as a percentage of total operating cost was 33%, United’s (UAL) was 34%, American Airlines’ (AAL) was 35%, and JetBlue’s (JBLU) and Southwest’s (LUV) were around 37%.

Trend in airline fuel consumption and cost per gallon

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According to the Bureau of Transportation Statistics (or BTS), in the first half of 2014, fuel consumption of the U.S. airline industry increased year-over-year by a monthly average of 1.9% to 1,431 million gallons in June 2014. Cost per gallon reduced to $2.95 in June 2014 from $3.04 in the beginning of the year.

Airline strategies to reduce fuel consumption include reducing aircraft weight, using winglets, and replacing older aircrafts with new fuel efficient aircrafts. Although cost per gallon depends largely on fluctuations in crude oil prices, airlines have tried to reduce fuel risk through the use of derivatives.

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