COST OF JET FUEL VS. AIRFARE PRICING

FEBRUARY 2015

•  Quarterly changes in US jet fuel prices (spot) have been more volatile than the corresponding changes in domestic airfares.

–  Quarterly standard deviation of jet fuel prices was six times higher than that of airfares during the period 1997 - 2014

•  On a same-quarter basis, jet fuel Quarter-on-Quarter (QoQ) changes experience a negative correlation (-0.12) to airfares.

•  On an offset basis (compensating for the lag in changes to airfare by 1-2 quarters), correlation was in excess of 0.6.

•  Data suggests an average lag of 10 months before airfares are likely to reflect changes in fuel cost, if at all.

-80%

-60%

-40%

-20%

0%

20%

40%

60%

2007 Q1

2007 Q3

2008 Q1

2008 Q3

2009 Q1

2009 Q3

2010 Q1

2010 Q3

2011 Q1

2011 Q3

2012 Q1

2012 Q3

2013 Q1

2013 Q3

2014 Q1

AIRFARE VS. JET FUEL, QUARTERLY VOLATILITY

Airfare QoQ

Jet Fuel QoQ

All figures calculated on inflation-adjusted basis. Source: US Department of Transportation, IATA, FLYR Research

•  On an index basis (1995 = 1.00) the real cost of jet fuel in the US has more than doubled over the past 20 years, while the average real cost of a domestic airfare has slightly dropped (but otherwise remained extremely stable in comparison.

–  The inflation-adjusted average airfare in the third quarter of 1995 was $446.72, while the corresponding figure for the third quarter of 2014 $396.37

•  Seasonal factors (peak/off-peak travel periods), macroeconomic changes, and corporate operational efficiency remain conflating elements in interpreting data on a quarter-to-quarter basis.

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1.00

2.00

3.00

4.00

5.00

6.00

1995 Q1

1996 Q3

1998 Q1

1999 Q3

2001 Q1

2002 Q3

2004 Q1

2005 Q3

2007 Q1

2008 Q3

2010 Q1

2011 Q3

2013 Q1

2014 Q3

AIRFARE INDEX VS. JET FUEL INDEX, 1995-2015

Inflation-adjusted Fare Index

Inflation-adjusted Fuel Index

All figures calculated on inflation-adjusted basis. Source: US Department of Transportation, IATA, FLYR Research

TAKEAWAYS

•  While spot prices dominate news headlines, they are generally do not reflect the actual underlying cost to the airlines, who engage in extensive fuel hedging to mitigate financial risk due to market volatility.

–  The exact terms of each airline’s fuel hedging strategy differs, ranging from full coverage to zero coverage.

•  For periods when jet fuel pricing is able to affect change in airfares, such changes will take many months to unfold, and are likely to be extremely limited in magnitude.

•  The disconnect between fuel costs and airfares is a two-way street, both in favor of and against travelers, depending on the direction of fuel price changes.