Sulfur Rule Could Raise Fuel Prices

For most Pittsburgh travelers, the only obvious link between the cruise industry and the airline industry is that to board a ship, you first have to fly to a seaside destination.

Turns out there’s another, more arcane link — one that could result in higher plane ticket prices in 2019 and 2020.

The International Maritime Organization has instituted a new policy intended to limit ships’ dangerous sulfur oxide emissions. By Jan. 1, 2020, all ships must switch to a cleaner-burning diesel fuel — or install exhaust system scrubbers that accomplish the same goal.

While the shipping industry uses diesel fuel and the airline industry uses kerosene-based fuel, the fuels are of a similar grade and compete for refinery capacity. So when marine fuel prices go up, jet fuel prices follow. And when jet fuel prices rise, the costs can get passed on to the consumer.

“Jet fuel, after labor, is one of the largest operating costs for airlines,” said Bryan Dietz, PIT’s vice president of Air Service Development. “One of the obvious solutions to that is to raise prices.”

The lingering question for both airlines and consumers is just how much the price of jet fuel will rise. According to the International Air Transport Association, jet fuel prices are expected to remain high in 2019, despite the falling price of crude oil. Analysts there predict an average price of about $81 per barrel, thanks in large part to the sulfur rule. Morgan Stanley is warning that the rule could push prices over $90 per barrel by 2020.

Airlines are already preparing. At Delta’s Dec. 13 Investor Day meeting, CFO Paul Jacobson acknowledged the price forecast but assured investors that the company’s ability to produce its own fuel would soften the blow.

A Condor Airlines Boeing 767-300ER is refueled at its gate at Pittsburgh International Airport.

“There’s going to be a little bit of a supply/demand tension,” he said. “So that’s not great for airlines, but it’s less not-great for an airline that owns a refinery.”

The consequences on airports are a bit hazier. Dietz predicts that the biggest fallout for mid-size airports like PIT could be reduced flight schedules in an effort to conserve fuel. For example, airlines might fly one large plane rather than two smaller planes to a destination. The elimination of an existing route is typically a last resort.

But while Dietz is optimistic about the airlines’ strategy for dealing with fuel prices, he’s also realistic about the airport’s role in such a scenario: When it comes to fuel prices, there’s little the airports can do. Airports don’t control fuel prices, and their fees only account for a small percentage of an airline’s total operating cost.

“What we can do is continue to provide a predictable and consistent cost structure with a market that has demand to travel,” Dietz said. “We control what we can so that the uncontrollable is able to be managed and absorbed.”

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