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The one where we estimate aviation can reduce US oil demand by 6,700 barrels per day
That's equal to Vermont's heating oil consumption
With the U.S. weighing Russian oil sanctions—or perhaps having already cut off Russian exports by the time some read this—crude surged at the open this week, topping $130 for a time Sunday night. Though the supply-side has garnered the preponderance of attention, our aviation niche plays an outsized role in the demand side. The U.S. consumed 20.8 million barrels per day of petroleum products in December 20211, of which 1.53 million barrels (7.3%) is attributable to jet fuel. Right off the bat, we need to give that a haircut2 for non-commercial consumption, which yields 1.11 million barrels (5.4% of total U.S. consumption) attributable to commercial aviation.
Our thoughts are with the people of Ukraine, especially the Kyiv-based designer we partnered with this past fall.
Miles4Migrants, which United and Delta previously partnered with, indicates NGO’s haven’t begun to submit requests for displaced Ukrainians. In the interim, they recommend donating to their partners IRC, HIAS, and UNHCR. Not waiting for Miles4Migrants, United and American have kicked their miles donation programs into gear, with Airlink a beneficiary (among others). Additionally, Lufthansa’s Innovation Hub had a nice round-up of travel-centric donation options in their most recent newsletter.
If your experience reading this post is anything like ours writing it, you’ll check Jon Ostrower’s Open Source Intelligence list on Twitter between every sentence. Given the tone on social media, we’ll be doing less self-promotion for the time being—with that said, we’d be particularly appreciative of anybody who shares this bit of writing.
There’s no shortage of options for airlines to reduce fuel consumption on the margins; there’s also no shortage of motivation, with their fuel expense representing one of the largest cost items. While salaries have been the largest cost category recently, the last time oil was trading at these levels (first quarter of 2014), fuel expense was atop airline income statements. Unfortunately, many options at the airlines’ disposal—reduced APU usage3, cost index optimization (i.e. flying slower when estimated to arrive early), single engine taxi—are procedural changes that require wrangling a large workgroup [of which some faction is reluctant to complete training and/or subversive towards management]. We’d also bet the price of oil is starting to influence Network Planning decisions, though we similarly think these are marginal available seat miles4 (ASMs) on the cutting table. Ultimately, Network will match capacity to demand and cost conservatism is likely to win out only when the planner is already on the fence about that frequency (by nature, planners want to add). Moreover, unit cost guidance often excludes fuel (i.e. CASM-ex), which may incline the planner to keep those marginal ASMs in the denominator.
Where is the opportunity?
There are a few cases, however, where airlines are disallowed from matching capacity to demand due to slot usage requirements. Pre-COVID, the FAA administered scheduled5 runway slots at capacity-constrained airports, namely New York-Kennedy (JFK), New York-LaGuardia (LGA), and Washington-Reagan (DCA). Additionally, while Newark (EWR) is considered a schedule-facilitated—not slot-controlled airport, like JFK, LGA and DCA—it behaves more like a slot-controlled airport owing to its Reference IDs. In response to COVID, the FAA announced a slot usage waiver at these 4 airport on March 16, 2020, allowing airlines to match capacity to cratering demand. This slot usage waiver lasted through October 30, 2021, when its applicability was pared back to those slots associated with international operations only. Overnight into October 31, frequencies at the 4 slotted airports increased by 14.7% (the rest of the country, on account of normal weekday patterns, increased by 5.6%); month-over-month, November slotted frequencies increased by 26% (while the remainder of country fell by 4.8%).
After demonstrating a load factor lead over the rest of the country (“US-ex”) from May 2021 through Oct. 2021, the mandated increase in November capacity unsurprisingly sunk load factors for slotted airports. Month-over-month, Nov. load factors for unslotted airports climbed nearly three quarters of a point (to 81.6%) while slotted airports fell by more than 3 percentage points (to 79.2%). Holding revenue passenger miles6 (the numerator in a load factor calculation) constant, we asked ourselves how many available seat miles (the denominator) could have been removed from November slotted airports to yield a load factor equal to the rest of the country. The answer? We estimate airlines could have removed 3.01% of ASMs from slotted airports in November.
How big is the opportunity?
What does that mean in terms of total US airline capacity? Let’s use May 2022 selling schedules—we think these are representative of actual plans and changes could still be effected (sorry, Current Schedules readers). In addition to what schedule to use, typically there’s a problem of attribution when it comes to ASMs, (i.e. do you assign them to the origin or destination). For the sake of this exercise, we fortunately just need to answer how many ASMs touch (i.e. to or from) one of our slotted airports. As of the Mar. 7 OAG snapshot, 101.9 billion ASMs are scheduled by U.S. carriers for May, of which 20.3 billion touch DCA, EWR, JFK or LGA. Applying the 3.01% from the previous paragraph, we estimate airlines could remove 611 million May ASMs from slotted airports, which equals 0.6% of total U.S. airlines ASMs.
We believe ASMs are a serviceable proxy for fuel consumption, i.e. if ASMs decline by 0.6%, then fuel consumption will decline by the same amount. If this relationship holds, we could expect a 0.6% decrease in U.S. airline ASMs to reduce oil consumption by 6,673 barrels per day, or 0.0321% of total U.S. petroleum consumption. That may not seem like much, but let’s translate that to gallons (multiply by 42), when we land on 280,282 gallons per day. That transformation allows us to better contextualize the scale: The state of Vermont consumes 284,515 gallons of residential and commercial heating oil per day7.
Two important assumptions
This assumes airlines behave rationally in matching capacity to demand at slotted airports. For [anti-] competitive reasons, minority airlines may attempt to gain market share, even in the absence of short-term economic support, when the lack of slots had previously prevented them from doing so. For example, JetBlue’s EWR schedule, where they had a limited slot portfolio pre-COVID, had already exceeded pre-COVID levels by August 2020—this despite load factors below 50% (JetBlue’s 2019 EWR load factor was 86%8). Accordingly, dominant airlines at a slotted airport may “sit” on their slots to protect against interloping.
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This also assumes that airlines don’t redeploy rationalized slotted capacity to backfill capacity lost to the regional pilot shortage. In such a scenario—and we recognize this is almost certainly an academic exercise—we think airlines likely would re-spend some of this capacity. That said, total May 2022 capacity from US airlines (from Mar. 7 OAG snapshot) is down just 5.2% from 2019, though Bain estimates that North American demand will be down 16.4%. Overall, it seems there’s still excess capacity in the broader market and no dire need to reallocate capacity from DCA, EWR, JFK or LGA.
We’ll be back later this week with an outlook for travelers setting out for (or returning from) Spring Break. In a bit of a surprise, Sunday—not Friday—was the more heavily traveled day this past weekend and we’ll shift our attention accordingly for this upcoming weekend.
“However, analysis of flight-level data provided by Cirium on commercial passenger flights—a category of aircraft that the U.S. Energy Information Administration (EIA) estimates accounted for 73% of total U.S. jet fuel consumption in January 2020…”
On-gate APU usage is especially complicated by the air quality benefits of supplying APU-powered airflow during deplaning/boarding.
One seat (empty or full) flown one mile. Often referred to as the airlines industry’s measure of capacity.
In this regard, we’re talking about slots that airlines must adhere to when constructing their months-ahead schedules.
To this point, when we’ve used the word slots in earlier blogs, we’ve largely referred to the creation of day-of slots in association with traffic management initiatives.
One paying passenger flown one mile. Often referred to as the airline industry’s measure of “traffic”.
2020, annualized. Because cold weather affects heating demand, most heating oil use occurs during the heating season. Source: EIA, Adjusted Sales of Distillate Fuel Oil by End Use
Source: BTS T-100 Market data