Coronavirus May Sink Jet Fuel Demand By 31% As Airlines Ditch Middle Seats, Turn Flyers Into Unsecured Creditors

With several global airlines grounding their fleet in the wake of the coronavirus or Covid-19 global pandemic, the industry is witnessing some profound changes in near-term economics and operational dynamics.

According to publicly available information, major European, North American and Asian carriers have grounded 50% to 75% of their fleets, and in the case of European budget operators practically their entire fleet.

Oslo, Norway-based analysis firm Rystad Energy expects global commercial air traffic to fall by at least 23% on an annualized basis over the course of 2020, which comes to around 100,000 fewer flights per day. This is just a preliminary estimate and could be revised higher.

As a result, many distressed airlines are now facing heavy cost cuts and are laying off unprecedented numbers of employees as many non-essential routes are closed. Given the situation, Rystad Energy assumes that the common summer air travel peak will not occur at all this year. That brings us to aviation fuel, an oil product that is the most obvious casualty of current civil aviation market chaos.

“We now see global jet fuel demand falling by almost 31% year-on-year, or by at least 2.2 million barrels per day (bpd) on last year’s demand for jet fuel seen at about 7.2 million bpd. Jet fuel demand in April will be as low as 2.6 million bpd and in May 2.4 million bpd,” says Per Magnus Nysveen, Head of Analysis at the firm.

According to the International Air Transport Association (IATA) jet fuel is currently down 70% on average compared to the same month last year. While that could result in the opening up of new long haul routes or the return of those that have been shelved when Covid-19 clouds lift, the windfall isn’t going to bring any savings or immediate operational relief for airlines with people flying less.

That is being sought in novel ways, including a key enticement to bring people back to airplanes. Earlier on Thursday (April 16), European budget airline easyJet said it would leave middle seats in its aircraft unoccupied when it resumes operations in the spirit of social distancing, till a vaccine is found for Covid-19 or the pandemic abates.

Other European carriers are expected to follow at least on their short-haul routes and Asian carriers are also examining the policy. While the easyJet announcement has grabbed headlines, U.S. carriers have been way ahead in that respect. The likes of American Airlines
AAL
, Delta Air Lines
DAL
, Southwest
LUV
and United Airlines
UAL
have had the measure in place since March 27.

Of course, little does it matter these days. Aircraft, where they happen to be flying, are on average registering a 20% to 30% occupancy rate with the dreaded middle seat getting very few takers these days by default. Something easyJet will doubtless encounter when it re-takes to European skies.

While customers might not mind the demise of the middle seat, however temporary, flyers are having to contend with another unwelcome development – carriers offering redeemable vouchers instead of full refunds for cancelled flights or rescheduled plans, should re-booking not be to the flyer’s liking.

“Basically, we are trying to push as many vouchers as possible, and not allow for cancellations just to be refunded immediately,” Ulrik Svensson, Chief Financial Officer of Lufthansa, told investors in the wake of the spread of Covid-19 last month.

He is not alone. Other airlines, on either side of the Atlantic, have expressed similar sentiments. Of course, by law and under contract of carriage in these extraordinary times, the avenue of full refunds is available to many customers but it is getting more arduous to avail.

For instance, if a voucher of the value of your spend redeemable in the future is your preference, then it can easily be done online. However, if you would like a full cash refund, many airlines require you to ring their customer service helpline along with thousands of others and tough it out for hours before you get through. Once you put your request in, there might be an average wait of three weeks to have the money back.

Of course, many give up and opt for “online vouchers” or as a spokesperson for Air France calls it “customer credit vouchers for 12 months that can technically be refunded only at the end of that period.”

In other words, holders of these vouchers – which in the case of frequent flyers run into thousands of dollars – basically become unsecured creditors of the airline, who have on paper lent the carrier the total amount of their cancelled ticket(s) for a finite time without getting any interest on the money, and very little protection should the carrier go under. Expect strange times in the industry to get stranger still before it gets better.