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Jessica Mendoza (3:37)

The problem we're talking about here is jet fuel. But isn't the issue that oil is stuck in the Strait of Hormuz? So what's the difference?

Matthew Dalton (3:46)

Oil is crude oil, okay? That's what comes out of the ground.

Jessica Mendoza (3:51)

Our colleague Matthew Dalton covers the geopolitics of energy.

Matthew Dalton (3:55)

Jet fuel is what's refined from crude oil and it's transformed into jet fuel in huge factories that crack open the crude oil molecules, strip them down, clean them into something that can be put into a plane. And the Persian Gulf, as it happens, supplies a lot of crude oil, but it also supplies a lot of jet fuel, refined jet fuel from refineries that are on the wrong side of the Strait of Hormuz right now. So, you know, the impact on the industry has both been because crude oil has not been available from the Gulf. It's also because jet fuel itself from refineries and on the Persian Gulf has not been available.

Jessica Mendoza (4:40)

Matthew says the regional consequences of the conflict quickly became global.

Matthew Dalton (4:45)

Since the Strait of Hormuz has been closed due to the conflict, about 20% of the world's jet fuel has not been able to get to global markets and pass through the Strait of Hormuz. And that has been a big problem for the jet fuel supply for airlines.

Jessica Mendoza (5:05)

Okay, so if some of the jet fuel, 20% of jet fuel is coming out of the Gulf, where does the rest of it come from?

Matthew Dalton (5:13)

China is a big importer of crude oil, but they are a huge refiner. So they do actually end up exporting a lot of their jet fuel. But since the crisis has started, they've been stopping exports and keeping production at home for their domestic airlines.

Jessica Mendoza (5:28)

And how significant is that?

Matthew Dalton (5:30)

Well, I mean, in Asia, that's been a big problem for, like, regional carriers. Countries like Vietnam and Myanmar have had to slash operations. In Pakistan, airlines have been told to fly in with much fuel as possible so that they don't have to refuel much to take off again because the Pakistani authorities don't want to stress their, their jet fuel supplies. So, like, that's, that's been a knock on effect, you know, of China as well, because China is such a big exporter in the region, or was.

Jessica Mendoza (6:05)

And it's not just jet Fuel exports out of China that have had an impact. Asian economies also buy about 85% of the crude that passes through Hormuz. Without that oil, other refiners in the region can't produce jet fuel either.

Matthew Dalton (6:19)

And if they can't replace that crude, you know, in relatively short order, one of the things they would do is just like, you know, ramp down production. Maybe not shut the entire refinery, but shut some units.

Jessica Mendoza (6:35)

On the other side of the world, in Europe, authorities have said that there's a ticking clock on the remaining jet fuel supply.

Matthew Dalton (6:42)

A few weeks ago, Europe's airport industry body warned that if the Strait of Hormuz did not open, you know, within the next three weeks, that shortages were a possibility. In Europe, the authorities have been doing things to monitor, like the flow of jet fuel around the continent, and refiners have, you know, switched their dials to max jet fuel production mode.

Jessica Mendoza (7:06)

Right.

Matthew Dalton (7:07)

You know, I was actually at Europe's largest refinery. That's the Pernis refinery in the Netherlands, that's owned by Shell. And they, you know, they can produce a number of different fuels. They can produce diesel, jet fuel, gasoline, and they were on the jet fuel max setting.

Jessica Mendoza (7:23)

How long might it take for the jet fuel supply to get back to where it was before the war?

Matthew Dalton (7:29)

Well, supposing there's a permanent ceasefire and that as part of this ceasefire, Iran is allowing free passage through the Strait of Hormuz, Assuming that that happens. Hmm. Then there is some jet fuel sitting on tankers in the Persian Gulf right now, and that is sitting in storage facilities in the Persian Gulf that will need to be shipped out. And then these refiners need to ramp up their production again, you know, for. For the. The flow to get back to normal. It would probably take more than a month if all the geopolitics have been completely sorted out.

Jessica Mendoza (8:14)

The upshot of all of this is that the soonest that the global supply is likely to return to something like normal is, optimistically, summer. And in the meantime, Matthew says a lot of the world is buying their jet fuel from another big producer, the United States.

Matthew Dalton (8:31)

The United States is actually, as a single country, is the world's largest producer of jet fuel by a long measure. So the United States, when it comes to energy, is in a good position here. The United States is the jet fuel superpower, but it is a global market. And what happens in the Middle east affects the United States, not because there's a threat of shortages, but because there's significant upward pressure on prices because of this conflict.

Jessica Mendoza (9:05)

And who's Feeling that pressure the most right now. Anyone buying a plane ticket, that's next.

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Alison Seider (9:36)

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Alison Seider (10:07)

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Jessica Mendoza (10:26)

As much of the world starts to ration their jet fuel usage, when it comes to airlines in the US they're more focused on the cost of fuel.

Alison Seider (10:35)

For airlines, the most acute impact that they're feeling is in the price of fuel. Jet fuel prices have just skyrocketed since the war began.

Jessica Mendoza (10:48)

Since the conflict began, the price of jet fuel has more than doubled to a record high of over $200 a barrel. That's a huge issue for airline companies because jet fuel makes up about 25% of their expenses. Our colleague Alison Seider again, I mean,

Alison Seider (11:05)

it's typically like their second biggest expense after labor. So it is one of and sometimes their biggest expense.

Jessica Mendoza (11:14)

So how much more are airlines expecting to spend on fuel this year?

Alison Seider (11:18)

It's a lot more, I think. American Airlines said that their fuel bill is going to be $4 billion higher.

Jessica Mendoza (11:26)

$4 billion higher just this year?

Alison Seider (11:29)

Yes.

Jessica Mendoza (11:29)

Wow.

Alison Seider (11:30)

It's a lot more money.

Jessica Mendoza (11:33)

And the brunt of those costs will go to the consumer.

Alison Seider (11:36)

For the US Airlines, especially the really big airlines, the vibe is kind of like it's a big deal, but they're managing like they feel really optimistic, actually, that they can manage these high fuel prices by charging higher ticket Prices and that there's so much demand for air travel that people, people will just pay it.

Jessica Mendoza (12:02)

And how much have airlines raised ticket prices so far?

Alison Seider (12:06)

There have been five pricing increases in the last couple of weeks that airlines have put through, and they say that they're holding, and there's a sixth one kind of underway right now. So ticket prices are already up like 20% right now. And they seem pretty confident that by the end of the year they'll be covering, you know, almost the whole run up in fuel prices, if not all of it through higher fares.

Jessica Mendoza (12:29)

And is it just those fares that are going up or are consumers going to see higher costs anywhere else?

Alison Seider (12:35)

Yeah, I mean, the big one that we've seen in the US Is bag fees. I mean, at this point, they've tacked another $10 on to the bag fee. And, you know, I think we can sort of expect that's here to stay. We have seen fuel surcharges. That's pretty much, you know, that's a lot by foreign airlines or on international routes. That's where that really appears. Just adding an extra surcharge to cover the cost of fuel.

Jessica Mendoza (13:01)

Beyond making flights more expensive, airlines are also starting to offer fewer flights.

Alison Seider (13:07)

There might be fewer flight options. We're starting to see airlines cut that capacity because they're just no longer going to fly unprofitable routes. A route that wasn't making money, you know, at $2 a gallon, Jet fuel is certainly not going to be making money at $4 a gallon.

Jessica Mendoza (13:25)

Are airlines right, though, about travel habits? Like, will people just keep traveling even if it gets more expensive?

Alison Seider (13:32)

You know, I think it really depends what else is going on in the macro economy.

Jessica Mendoza (13:35)

Okay.

Alison Seider (13:36)

Right now, airlines are saying the economy still seems fairly healthy, especially for kind of the upper echelon of consumers that a lot of the airlines have been focused on. You know, the people who will pay to sit in premium seats or business class seats, they're still wanting to get out and travel at the moment. You know, but we've had airline executives acknowledge in the last couple days, like, at some point, you know, fares are up 20% and it may go up from here. Like, at some point, you have to imagine that does start to cut into demand. They haven't seen it yet, but that is what you would expect at a certain point, that people will think twice about a trip or if they're feeling less well off in other ways. But so much depends on the rest of the economy, right?

Jessica Mendoza (14:25)

Like, how much is the consumer willing to eat to be able to go on a summer break. On a summer trip.

Alison Seider (14:31)

Yeah. And right now, the airlines are saying, like, yeah, we think it will come that they're. You know, it would make sense to us if people pull back, given these higher prices, but we're just not seeing it. So until we get to that point, I think they're feeling pretty good, some of them.

Jessica Mendoza (14:45)

Right. Willing to play chicken with the consumer.

Alison Seider (14:48)

Yeah, exactly. You know, for now, airlines are saying their bookings are. They're really happy with them, but we could start seeing that show up more and more as the summer goes on. And another place that this might show up more. And we'll hear more from the budget airlines as they report their earnings. You know, they really target a customer that is a little bit more price sensitive, and we might start seeing it show up more with some of those airlines.

Jessica Mendoza (15:15)

One of those budget carriers is Spirit Airlines, which was already in trouble even before the spike in fuel prices.

Alison Seider (15:22)

The first real domino to fall is Spirit, which was in bankruptcy for the second time in less than a year. Like a really vulnerable airline to start with, it had an agreement with its creditors to come out of bankruptcy, and that agreement has just been sort of totally upended by fuel prices. And that's why we're seeing Spirit kind of in talks with the government for a bailout.

Matthew Dalton (15:44)

President Trump reportedly thinking about invoking the Defense Production act as the legal basis to save Spirit Airlines. Proposed big government bailout for Spirit Airlines worth half a billion dollars.

Jessica Mendoza (15:58)

Still, airline stock prices across the board have taken a hit over the last few weeks, in part because the longer the conflict goes on, the longer fuel prices will stay high. Do you feel like prices will eventually go back to the way they were if things settle down in the Middle East?

Alison Seider (16:18)

Well, that's sort of the big question. You know, historically, yes, they do come back down if, you know, if demand starts to ease off, you know, which might happen. The airline executives who've been asked about this over the last week are actually hopeful that it won't happen. They think airfare has been an incredible deal over the last couple of years. It just hasn't gone up as quickly as inflation. They think prices deserve to be higher, basically, and would like them to be higher. They're hoping, yeah, all this capacity, all these unprofitable flights are going to come out of the market. Weak. Airlines might either go out of business or get acquired or might just have to shrink a little bit. So there will be less supply and demand is still good. So maybe fares will stay high this time. That's not a message that consumers love to hear, but it's definitely something their investors like to hear. So that's what they've been talking about on their earnings calls the past week, that maybe this time is different and these higher fares are here to stay.

Jessica Mendoza (17:19)

It's interesting, at least for US Carriers. It doesn't sound like this is a moment of anxiety at all. It's more of a moment of opportunity.

Alison Seider (17:26)

I think some of them do feel that way, that this is something that they believe is very manageable for them. I think we are seeing a test of how the airline industry has changed over the years, that there have been a lot of mergers. There are fewer airlines than they used to be, and they pride themselves on being more disciplined, not engaging in a race to the bottom on pricing. Some of the airlines, at least in the industry, are a lot financially healthier than they've really ever been and that this is a crisis that is very manageable to them. Given the way that this industry has changed, I think we will test the limits of that and we will see carriers that are in that position and carriers that aren't.

Jessica Mendoza (18:14)

If I'm a traveler, though, which I am for a consumer, if a consumer asked you, hey Alison, you know all about airlines. Should I book travel for the summer right now? What would you say?

Alison Seider (18:28)

I don't think ticket prices are going to go down for a while, you know, unless fuel prices sort of very sharply decline. And even maybe not then. I mean, we might not see fares come down immediately then. So I think if you want to travel this summer, I would say it's better to book earlier rather than later.

Jessica Mendoza (18:46)

So it's like it's a good time to act because prices might go even further up.

Alison Seider (18:50)

Yeah, I mean a better time to act would have been two months ago, but your options are not getting better.

Jessica Mendoza (19:05)

That's all for today. Monday, April 27 the Journal is a co production of Spotify and the Wall Street Journal. Additional reporting in this episode by Ben Kat. Thanks for listening. See you tomorrow.

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