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Rise in Jet Fuel Prices Weigh Heavily on Values of Older Aircraft

April 16, 2018

The last year has seen jet fuel prices jump by nearly 40 percent and if sustained, this could have a negative on the values of older and mid life aircraft which are now so much the focus of investors seeking to bypass the low margins being experienced on new aircraft.

The price of jet fuel has seen an increase from around $1.4 a gallon in April 2017 to just under $2 a gallon as of today. This is having a considerable effect on the bottom line for many operators and is hurting profits to the extent that some airlines have cited fuel prices as contributing to their demise. Combined with currently fluctuations, the rise in the price of fuel is affecting most airlines. Those airlines with longer sector lengths and older aircraft are most at risk as the fuel component of direct operating costs are that much higher. To some extent, the exposure to higher fuel prices is to reduce the utilization of aircraft but high utilization is needed to offset higher finance charges. Operators using older, or even mid life aircraft, are finding themselves at a disadvantage when compared to operators with new aircraft. In turn, the handback or failure to extend leases on aircraft will see the lessors having greater difficulty in placing aircraft or having to accept lower than expected rentals.

Newly delivered aircraft – there were 1,637 Western jets delivered in 2017 versus 1,607 in 2016 and 1,127 in 2007 – have the potential to increasingly act as replacement rather than growth capacity. Fortunately, with passenger traffic growing at more than seven percent, well above trend, operators have little alternative to but to opt for older aircraft even if the risks are that much greater and sustained profitability that much more elusive – note Allegiant acquiring more A319s.

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