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Tue, Mar 17, 2009

Airlines Benefit From Drop In Jet-A Refining Costs

"We'll Enjoy It While We Have It"

The recession has been almost uniformly bad news for airlines, but the industry has found one silver lining -- Jet-A fuel is piling up at refineries, causing its price to plummet.

The Fort Worth Star-Telegram reports the cost of refining jet fuel has fallen from about $25.50 per barrel of crude oil a year ago, to an average of $21 in January and $15 in February. One week ago Tuesday, it stood at just $4 a barrel.

For airlines which hedged too much of their 2009 fuel needs at prices which now seem high, the drop in what's called the "crack spread," or the costs of refining, are especially good news. The hedge contracts lock in the cost of the oil per barrel, but not the refining costs. John Heimlich, chief economist for the Air Transport Association, calls the savings for airlines, "significant."

He says refiners who shifted production capacity to jet fuel as auto gasoline consumption declined have now created a glut. "There is a time lag in terms of how quickly they can shift their refining, so you still have a lot of excess inventory," Heimlich said.

A one-dollar drop in refining costs saves the industry an estimated $400 million a year.

But, noting the crack spread rose suddenly to $60 per barrel after Hurricane Katrina, Heimlich is cautious in his optimism. "We’ll enjoy it while we have it, and take every penny we can get."

FMI: www.airlines.org

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