Since reaching its peak in February 2013 (average price of 3.22 USD/Gal), U.S. Gulf Coast kerosene-type jet fuel prices have declined by nearly 71% (to a average low of 0.93 USD in January 2016). It appears that jet fuel prices have bottomed and in fact stabilized at a narrow range of 1.25-1.35 USD. Over the next two years, it is forecast that jet fuel will remain in this narrow price band with only potentially a 7% upside increase.
Over the past decade, spurred by airline demands, aircraft and engine manufacturers spent billions developing technologies to increase fuel efficiency, and reduce emissions and noise. The resulting new generation aircraft, such as the Boeing 737Max and the Airbus 320Neo families sporting ultra-high bypass ratio geared turbofan engines, are now beginning to enter service. According to manufacturers, the new generation aircraft will improve fuel consumption by at least 20%. But these new aircraft come at a cost, with most being price at least 10% higher than the prior models.
However, the operational cost savings, that the airlines so sorely sought after from the new generation aircraft, may not materialize as a result of the dramatic drop in jet fuel prices. Many airlines are now reporting 40% to 50% reductions in fuel cost, much higher than the 20% expected from the new aircraft.
With the price of jet fuel remaining at or below 2.00 USD per gallon for the foreseeable future, older generation aircraft will remain competitive with new aircraft, particularly in low utilization network or as spares. Airline will have different fuel price point thresholds depending on their specific route network, overall fleet age, and any existing fuel price hedging.
With the expectation of a prolonged low fuel price environment and an impending rise in interest rates, there are a number of interesting consequences materializing for the industry:
Major lessors have already begun to sell, cancel or delay aircraft orders or rebalance their portfolios toward older and current aircraft models.
Airlines are beginning to add capacity at a much lower cost using older aircraft.
Investors are seizing the opportunity to start new airlines using older aircraft types.
Aircraft MRO's are benefiting from older aircraft remaining in service longer, thus requiring more service hours.
Aircraft manufacturers are losing as the demand for new generation aircraft drop-off.
Research and development in aircraft aerodynamics and engine performance and efficiency improvements is slowing.