Airlines are optimistic about business in 2015, but geopolitical tensions and economic instability could reduce jet fuel demand, while new refinery capacity in the Mideast Gulf may boost jet fuel imports to Europe.
World air passenger traffic is on course for somewhat stronger growth in 2015, with the International Civil Aviation Organisation (ICAO) forecasting a 6.2pc rise in 2015 passenger traffic, from 5.5pc annual growth in 2014.
The bulk of air travel growth will be led by markets outside Europe, including the Middle East, where the International Air Transport Association (Iata) forecasts continued expansion as the region develops links with emerging markets in Africa and Central America.
Passenger traffic between North America and Latin America fell in the second half of 2014 as a result of a weakening Brazilian economy, economic problems in Argentina and reduced capacity to Venezuela. But Iata expects volumes to pick up in the coming months as data show that trade and exports are strong.
Cargo growth gathered strength in 2014, almost regaining the long-term trend rate after two years of flat or negative growth before the second half of 2013. But slowing business activity in China is affecting new export orders. Iata said that the slowdown has not yet lowered cargo volumes but there may an impact in coming months. Global cargo volumes are set to rise by 4.5pc in 2015, slightly higher than the 4.3pc growth in 2014.
Iata chief executive Tony Tyler said $6.8 trillion worth of goods, or 35pc of total world trade by value, was transported by air in 2014.
But there are downside risks to demand growth. These include an exacerbation of geopolitical concerns, the volatility of oil prices, and financial instability in the eurozone and elsewhere.
Demand for air transport relies heavily on the strength of the economy and during the second half of 2014, the global economy weakened. Military escalation in the Middle East, the Ukraine crisis and economic sanctions against Russia played a key role in the economic deterioration and some airlines said they see the disruptions continuing into 2015.
Russian airline Aeroflot reported losses of 3.6bn roubles ($68mn) in the first three quarters of 2014, mainly as a result of currency trends, weakening consumer demand and a downturn in Russia's tourism industry.
But the geopolitical situation does not only affect Russian airlines. International airline passenger numbers fell by 5.5pc in October compared with a year earlier partly as a result of a lower frequency of flights to Ukrainian destinations, and European airlines' international freight volumes showed a decline of 1.6pc in September. Austria's Vienna Airport attributed a decline in profits during the third quarter to flight cancellations as a result of political instability.
"Russia is the biggest concern, with sanctions, a spiralling currency and uncertainty driving business expectations down sharply to a new low," Markit chief economist Chris Williamson said. Russia's geopolitical tensions and unstable economic environment are concerns for German companies and could hinder near-term growth. Already, downturns have been recorded in Germany's new orders, production and investments since the beginning of the second half of 2014.
Scheduled international flights to and from Russia are set to grow by 3.1pc in March 2015 compared with the same month a year earlier. But the increase is patchy. Data from Flightglobal suggest Ukrainian airlines' flights to and from Russia would decrease by 43.5pc while flight numbers on German airlines are set to decline by 8.5pc on the year.
While such risk factors could weaken European demand, jet fuel availability is set to increase. Sophisticated refineries in the Middle East and Asia are coming on line and will increase jet fuel supply to the European market.
The Saudi Aramco-Sinopec 400,000 b/d Yasref joint venture at Yanbu was due to be operational by the end of 2014 while Adnoc's 417,000 b/d Ruwais refinery, expected to maximise jet and diesel output, will reach full capacity in the first quarter of 2015. Although some product will go to increasing domestic demand, traders expect supplies to Europe to rise.
"The projected amount of jet should put pressure on refinery margins, as demand is not expected to pick up greatly," global risk management firm GRM oil analyst Michael Poulsen told Argus. "Jet fuel, however, might only become cheaper on a relative level. The absolute level is subject to the fluctuations of crude oil."
Jet fuel traded in a relatively wide range between October and November 2014. Cif northwest Europe prices averaged around $803.80/t over the period, falling sharply in late November following the steep drop in crude prices after Opec decided to maintain its production ceiling. Iata expects jet fuel prices to average $787/t in 2015. Lower fuel prices will benefit airline companies as global airlines' fuel costs will fall to $192bn in 2015, down from $204bn this year, while consumption is set to increase by 5pc on the year. Poulsen said lower outright jet fuel prices could spur demand and result in stronger jet premiums to gasoil futures.
Import levels were high for the end of 2014 with around 1.5mn t of product arriving in Europe from the Mideast Gulf in December and the same quantity imported in November. But the rise has been offset by a number of European refinery turnarounds and supply may become more balanced as further refinery closures are forecast.
Europe is dependent on imports of diesel and jet fuel, and the UK and France import a particularly high percentage. According to the UK refining trade association UKPIA, the UK currently imports 56pc of its jet fuel, and some 48pc of diesel. These figures could rise to 78pc and 77pc respectively by 2030 should another two or three UK refineries close.
Amsterdam-based ING Bank expects to see 5mn b/d of refinery capacity cuts in Europe over the next decade and only 60 out of the continent's more than 100 refineries are forecast to be operating by 2025. Total capacity would fall to less than 11mn b/d from about 16mn b/d in 2012, and the average refinery size would rise to 180,000 b/d from less than 150,000 b/d currently.
Airlines focus increasingly on fuel efficiency measures to reduce their consumption, as jet fuel accounts for around 30pc of their operating costs. Iata said that fuel efficiency increased by around 1.8pc in 2014 and expects further improvement in 2015.
Efficiency measures include European airlines modernising their 2015 fleets as they face increasing competition from Mideast Gulf carriers that are expanding into Europe with long-range jets. The aircraft can fly longer distances at lower costs and offer a larger number of non-stop flights.
The Mideast Gulf airlines are supported by oil-dependent governments keen to expand the aviation sector in a bid to diversify their economies. Such growth could draw jet fuel supply from the Middle East. State-owned Saudi Aramco and Total said that output from their Saudi Arabian refinery in Jubail, where middle distillates make up 55pc of the yield, is virtually all going to markets in the Middle East, Asia and east Africa.
Jet fuel traders are also keeping an eye on the use of biofuel to power aircraft. Germany's Lufthansa, Netherlands-based KLM, and SAS — the largest airline in Scandinavia — will all take biofuel supplied to Oslo Airport in March 2015. Statoil Aviation will supply 2.5mn litres of biofuel to the refuelling facility at Oslo Airport. Some airports installing biofuel tanks benefit from a climate compensation fund that will help meet the difference while the cost of production is lowered.
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