00:00Want this is hiking international fares about five percent as jet fuel prices spike in the mid the Middle East
00:07tensions.
00:08And I'm talking about some serious spikes here. You see 88 percent on this contract. I've heard of 150 percent
00:15jumps in the price of jet fuel.
00:17Let's break it down now with Savanti Sith Airlines Managing Director at Raymond James and Savanti.
00:22I wanted to highlight that number specifically because initially Danny and I were both like wait don't they hedge.
00:28You know how does one week make a difference. But if you have a hundred fifty percent spike in one
00:34week I could imagine that that overrides any hedges that you've got in place.
00:39Hey Matt. Good morning. You know it each airline is different. A lot of U.S. airlines actually do not
00:45hedge.
00:46Hedging is a very expensive insurance policy and there are other tools that airlines have kind of good balance sheets
00:52margins to to try and kind of work around it.
00:55And the best kind of tool that they have is capacity and fare increases in Europe.
01:00You have a lot of airlines that are hedged because it is very hyper seasonal.
01:03But but you're right that the airlines sell you know two three six months ahead of time.
01:09And and sometimes it helps to kind of hedge what you're you're going to be flying.
01:14But a lot of airlines are kind of open to the fuel price increase.
01:16And and this level of increase is really tough to overnight pass through.
01:21So airlines have to start right now.
01:23It might be worse in Asia. Matt and I were looking at a story this morning that Qantas is looking
01:27at raising their ticket prices in reaction to what's happening with fuel prices.
01:32That Air New Zealand might be shortly behind.
01:35Is this something the American air operators can do to do they have the room to raise prices in reaction
01:40to what we've seen over the past week?
01:43Yeah, we're hearing that some U.S. airlines are already trying to increase prices.
01:48I mean, definitely, if you think about the Strait of Hormuz and which regions are more impacted, it's definitely a
01:53bigger impact on Asia.
01:55But it is raising prices, you know, fuels a global product.
01:59It is raising prices for everybody.
02:01And you have U.S. airlines that are already trying to raise prices as well.
02:05And to your point, it's such a big move that they have to raise prices for some reason, Savi, I'm
02:12interested in incremental moves in oil and how that affects other outputs.
02:18So do you look at that like if jet fuel moves in a ten dollar band, how that affects earnings
02:24at a specific company?
02:26Yeah, I guess the easiest way to kind of think about it is, look, fuel is going to be anywhere
02:32between a fifth to, you know, for some airlines, it's 40 percent of costs.
02:38And so that is a significant hit.
02:40Now, you're looking at, you know, the type of moves that we've had right now.
02:43You're looking as much as 10 points of margin that has been wiped out once all of this flows in
02:48through the P&L.
02:50So you really have to kind of raise fares by, you know, 10 percent or more to at least kind
02:58of start making a dent in all of this.
03:00And the fuel prices, to be clear, Savi, they move on an amplified scale compared to Brent, right?
03:09If we see Brent go up ten dollars and that's a, I don't know, a 15 percent move, you could
03:15see jet fuel rise 40, 50, 80 percent.
03:19Sometimes. It really depends on the refining, you know, how many, if the refiners are down or not.
03:24And that's definitely what we've seen.
03:26So the move in jet fuel has been greater than the move in Brent in a lot of cases as
03:31some of the refiners are getting shut down as well.
03:34So this is, you're exactly right.
03:37It's been a much bigger move in terms of the impact to jet fuel.
03:41Savi, I know Delta owns a refinery itself.
03:44Does that airline emerge much less scathed, much more unscathed than its peers?
03:51Yeah. So hedging is one method to kind of get, you know, just doing swaps or caps or contracts like
03:59that.
03:59Delta does own a refinery. You're exactly right, Danny.
04:02You know, that should help them, at least on the refining margin.
04:05They are exposed to crude price increases, but on the refining margin, they should be able to offset some of
04:11that increase.
04:11It's still a negative impact overall, but it should be less at Delta.
04:16You know, I think one of the biggest concerns for economists is if we see this persist, and I know
04:23that, you know, higher price sustainability is key,
04:28you could see airlines reduce their aircraft purchases, right?
04:33I mean, that would be, for an economist, looking at GDP, the biggest fear.
04:37Do you see that as a possibility?
04:40Like, it really depends, Matt, on how long this lasts.
04:43If this is a short-term spike, then I don't think you're going to see any kind of change in
04:47CapEx.
04:48It is not as easy to work with the OEMs, especially for aircraft that's being delivered this year and maybe
04:55even to next year.
04:56But the longer-dated aircraft can get pushed out.
04:58What happens immediately is you start parking the aircraft that you have.
05:02You start flying them less, and you take seats out of the market, and that pushes kind of pressure on
05:07the fares immediately.
05:10So that's what I think what you see first.
05:12First, you start to see kind of the maintenance providers getting hit.
05:15And then, like, longer-term, if this fuel price persists, then you will see kind of order books getting narrowed.
05:23Hey, Savi, real quickly here, because we're almost out of time.
05:25The DHS and the partial government shutdown has now entered its fourth week.
05:30TSA agents are now starting to miss their full paycheck.
05:32Is that having any impact on these airlines, with these long lines at TSA, with demand?
05:39So far, we haven't seen an impact on bookings, but it is definitely a concern.
05:43I mean, this is a kind of bipartisan political failure that we're seeing here, and hopefully this gets resolved.
05:49But it's happening at a time that this is peak spring break period, and so hopefully this will get resolved
05:55soon.
05:56Right now, we're not seeing it as an impact on demand, but clearly, the longer this goes, it is a
06:01big concern.
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