May. 18 at 7:47 PM
Global jet fuel market is small - accounting for <7.5% of total oil demand but even the smallest suplly imbalance changes an airlines P&L instantly
Jet fuel reps roughly 25% to 35% of an airline's total op expenses & operates on razor-thin net profit margins—historically averaging just 3%-5%
Airlines don't just pay for crude oil; they pay for the cost of refining it into jet fuel - jet fuel crack spread - when these are elevated - refiners chase after them
Unfortunately for them, jet fuel has zero elasticity of demand - They are forced to absorb the price shock in real-time, whereas passing those costs onto consumers via ticket surcharges usually suffers from a multi-month lag which subsequently triggers demand destruction & reduces passenger load factors
Back of napkin:
A legacy carrier consuming roughly 4B gallons of fuel a year - every
$0.25 fluctuation in the price per gallon—whether driven by crude oil or the crack spread—translates directly to a
$1B hit to annual pre-tax P&L (assume no hedges)
$VLO $PSX $XOM $JETS