Fluctuating pricing of Jet Programs
Author: Outlier Jets Team
The seemingly never-ending travel restrictions imposed during the global pandemic put a severe financial strain on the aviation industry, especially in the scheduled commercial airlines segment.
Paradoxically, private charters reached new heights as a result of personal or leisure demand. A new clientele who sought to avoid the uncertainty with scheduled airlines during the pandemic continued to turbo-charge the attraction to private jet travel.
Private jets typically fly from small airfields which for the passenger means, minimum waiting times while also avoiding crowded airports. Clients travel with their own small group on a sanitized plane with the ability to reach parts of the world where commercial flights are restricted.
All seemed well in the private jet business…
That was until the 24th of February, 2022, the start of the conflict between Russia and Ukraine. The risk of interruption in oil and gas supplies from the world's third-largest oil producer sent shock waves through global economies; as a result, the northwest European jet fuel price in the spot market has soared by more than 85% this year.
The FT pointed out that Jet fuel has risen by a third to more than $150 per barrel since the Russia - Ukraine conflict plunged commodity markets into turmoil, although this figure has abated somewhat since then. The rise to 14-year highs has outpaced even Brent crude, as airlines have been forced to pay a premium for the refined product. A Bloomberg index of U.S. jet fuel prices shows the price of jet fuel has risen to top $12 US a gallon - more than twice what it went for as recently as December, and four times the cost prior to the pandemic.
In real terms, fuel surcharges are a fixed amount of money added to a flight typically on a per hour basis. Technically levied as "carrier-imposed surcharges," a fuel surcharge is the generic term for extra fees that some private jet programs charge in addition to the base airfare. A quote will include a projected cost in the hourly rate. A fuel surcharge is added to make up the difference between the projected cost and the actual cost. This arbitrary surcharge is decided on by each private jet company and generally depends on the route and of course, the size of the aircraft.
An article in Forbes stated that about 90% of jet programs use fuel surcharges and went on to add that these charges can add about 10% or more to the quoted hourly rate. Since the conflict in Ukraine began, the percentage of jet programs applying fuel surcharges is almost universal with the added cost likely to reach 15% this summer.
Persistent fuel surcharges
Prices had been climbing steeply even before the conflict in Ukraine, mainly due to soaring demand and limited supply growth. In fact, fuel surcharges actually began in 1973 as a result of the Arab oil embargo which spurred the DOE to compute the national Diesel price average, a move designed to compensate carriers impacted by fuel price fluctuations.
In the 90s air travel companies again operated using fuel surcharges and the DOE began to collate a national average fuel price which enables carriers to calculate regional and national fuel costs with accuracy as it is updated every 24 hours.
Inflation Adjusted Prices
Another concern for air travel companies and travelers alike is inflation which affects business across all sectors. This often leads to a vicious circle where inflation in one area of business; transport, manufacturing, energy, etc., triggers another and so on. Not only is private air travel not immune to inflationary prices, it is generally more exposed. With the US inflation recently hitting a new 40-year high of 8.6 percent while with Euro zone inflation at 8.1 percent, running a close second, customers can expect to see some or all of this added cost reflected in private jet charges.
Demand Far Outstripping Supply
If fuel costs and the highest inflation in four decades weren’t enough, there are also the market forces of supply and demand, and currently, demand for air travel is easily outstripping supply. The sensation of being restricted to a hometown or country meant many travelers, for business, family or simply as a tourist, became extremely frustrated. With the lifting of most travel controls across the globe, the accumulated exasperation converted itself into a desire or need to travel.
And here is the catch, over the last couple of years, the employment of ground-staff, crews and captains was scaled down. A bounce in upward demand has left many private jet companies with a shortage of staff which cannot be rectified instantaneously since only qualified staff is employed and that will require a substantial amount of training and therefore time. Customers can expect a reduction in available flights and scheduling will need to be planned well-ahead on some occasions.
Expect changes to private jet programs
As fuel costs typically represent around 30-50% of an aircraft’s hourly expense, any fluctuation in price will respectively affect the financial position of private jet companies. As the conflict in the Ukraine developed, many companies implemented fuel surcharges with their charter, jet card, fractional and other private jet programs. Some programs are locked and included, while other programs are variable and require a fuel multiplier whereas charter flights are set in real-time pricing; effectively, the cost is built-in.
Jet fuel is one of the biggest costs that private jet companies bear, so experts say that a surge will affect the price that travelers pay to fly, if it hasn't already.
As jet fuel prices remain elevated, coupled with record inflation plus demand outstripping supply, private jet companies face a critical calculation: How much of their fuel bill and other rising costs can they pass on to customers without leaving their planes empty?
Is there any relief in sight?
“Energy, in a way, is the tail wagging the dog here,” Bob McNally, president at Rapidan Energy Group, said Wednesday on CNBC. The general cost of everything consumed and every service engaged is governed by inflation and currently, inflation is dependent on fuel supplies.
Looking ahead, some experts say that demand destruction could be the only thing to quell rising gasoline prices: A recession in other words. Other experts are more positive believing a solution to the fuel supply shortage will emerge soon.
All in all, the future remains uncertain, with geopolitical forces, inflation and supply and demand all in the mix. At some stage, the situation will stabilize, although there are few experts who are willing to give a date as to when.