Listen in as energy and oil specialist Chris Russo talks about how airline managers should think about fuel strategy.
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Karen Walker (00:10): Hello everyone, and thank you for joining Window Seat, our Aviation Week air transport podcast. I'm ATW and Aviation Week Air Transport Editor-in-Chief Karen Walker. Welcome on board. So, we are now into the sixth month of the year since the U.S. and Israel launched military strikes against Iran, starting a war that has impacted the wider Gulf and Middle East region and effectively closing the Strait of Hormuz and therefore causing oil prices and particularly jet fuel to spike to heights not anticipated at the end of 2025. The strait may reopen, but the underlying reality hasn't changed. Geopolitical volatility, refinery constraints, and supply chain disruptions aren't going to go away anytime soon. That's what I believe, and I've got an expert in a minute who's going to talk about those things. If anything, they've reinforced that great enemy of airline planning, which is uncertainty. And now that seems to be a permanent feature of jet fuel markets.
(01:11): So what does this mean for airlines and how should they think about fuel? Which of course is a major part of their cost structure even in good times? So as I said, to discuss this, I am delighted to be joined by Chris Russo, who is the associate director for energy in North America at Publicis Sapient. Chris, welcome. Thank you so much for joining us.
Chris Russo (01:31): Thank you, Karen, for hosting me.
Karen Walker (01:34): So oil, oil capacity and costs are all big issues for airlines to manage, and they are especially complicated when they collide. I think this is going to be a fascinating and certainly very topical conversation. So again, thank you for joining Window Seat, Chris. You are the expert here. Let's start with a million dollar question. Even if the war truly came to an end tomorrow, say, and the strait reopened and went back to pre-war conditions, does everything return to normal?
Chris Russo (02:03): The short answer is no, at least not right away. I mean, look, let's just take a second to talk about whatever normal looked like in the past is going to be completely different now with how the strait is going to be managed. Now it is open season for countries to insert and interject and otherwise potentially interfere, if you will, moving forward. So we have now crossed that threshold. So moving forward, whatever happens in the strait, even in times of peace in the future, it could open itself up for more issues at a later point, for numerous different geopolitical reasons. But putting that aside, let's just even assume that everything is just, we could push a button and it goes back to love and peace and completely how it was pre-February, March of 26. There are two issues at play right now. There is a current state problem and a future longer tail problem that will rear its ugly head at a later point that will affect these jet fuel prices.
(03:13): The current state problem today is that refineries that take the crude and turned it into the products that we use like gasoline and diesel and jet fuel, they're at capacity. They cannot produce any more of the refined product. And when you add to the fact that refining capabilities have decreased not only because of this war, we talk about refineries that have been affected in the Middle East, bombed that need to be rebuilt, but also Ukraine doing the same thing in Russia to their refining capabilities. The global refinery output has actually decreased. So even if we're flush with crude, there's only so much that they can produce right now and the demand for it is still so high that we are in a problem today with those prices. So that's today's problem. And then Karen, unfortunately, the longer tail that we have not properly equated for yet is that there is going to be a crude inventory shortage.
(04:16): There already is one. We just haven't cooked it and baked it into our books yet because China, the United States have been pulling from their strategic reserves this entire time. They have not gone out specifically. China has not gone out to make a huge bulk purchase. There will come a point where the piper has to be paid. And unfortunately, and this is not coming from me, this is coming from people like the president of Shell saying we have lost a billion barrels of oil that have disappeared from the market. And so this just hasn't been factored into the prices of crude and anything of the sort. So that will come back to bite because that will jack up prices again in the future and cause problems downstream for things like jet fuel. So again, to reiterate, two problems. Current state, refineries at capacity, limited or less refining output.
(05:08): Future problem, crude inventory and supply. This is going to be a challenge for airlines for a long while.
Karen Walker (05:19): That's fascinating. Chris, I've learned more about oil this year than I ever dreamt I would. And I'm still, of course, not an expert prepared with you, but one of the things that you've raised there that I've been hearing is that people just don't understand. They just think it's oil. And then so when it becomes available again, it's just there, but of course it's the refining of it. It comes out as crude oil from somewhere, but it's got to be turned into something that can be used. And I don't think people quite understand that process and therefore why that will take some time to catch up. And then the other thing that you've just said, which is obvious if you think about it, the more people are depleting their reserves, the higher the price will go up.
Chris Russo (06:03): Eventually be. Yes. When they start calling in those chits and saying, "Hey, I need to buy five or 10 million barrels of oil and I need it now and I'm willing to pay top dollar." That will absolutely change the trajectory of the crude oil prices, which then will in turn downstream for the refined product. Yes.
Karen Walker (06:23): So the absolute basics of demand and supply or supply and demand. But at the end of the day, governments can't operate without jet fuel or even sustainable aviation fuel, but that's a whole different topic and there isn't anywhere near enough of that. So the truth is they can't operate without jet fuel. So with all of this now going on, how should airlines be thinking about fuel?
Chris Russo (06:49): Airlines need to stop or stop. Airlines currently and traditionally most look at fuel as just a cost of doing business. It's a line item for them to pay and not necessarily get ahead of. Hey, this is what it is. This is the cost, and we're just going to factor it in and so be it. But airlines need to start taking maybe a bit more of a longer term view and outlook on how they want to not only procure fuel, but how to manage the fuel and the procurement process as a whole. There's a whole sort of, if you think about just a left to right chain, there's so much that goes between signing a contract to buying fuel to ultimately putting the fuel into the wingtip and off you go. There's a lot of things in between where airlines, they do the best that they can, but the best was just good enough to get them through because prices have been pretty steady and reasonable for the last 20 plus years, give or take.
(08:00): So now you're at a crossroads where, hey, this global supply chain of oil can cause real problems. How can we look to get ahead of it? And I think that's where fundamentally airlines need to start to maybe look beyond maybe just the next month or the next quarter for fuel and look beyond and think about what would happen, kind of those scenario planning sessions. If oil goes to this level, what do we do? So that is what I would recommend more airlines think about doing.
Karen Walker (08:33): So again, when I'm looking at this and when I'm tracking what airlines have been doing these past few months because of what's been going on and because of the very high prices that, like I say, they hadn't anticipated as late as December, it's quite, I mean, they are taking action to control those costs, but it's what I would call reactive. They're doing things like cutting capacity, cutting roots that are not profitable or marginal, but certainly once the price goes up of oil, they become loss makers or cutting down on frequencies. You can see that. But like I said, that seems to me reactive. It sounds what you are talking about here is that there may be ways for them to be more proactive before these crises hit the reality. Am I correct in that?
Chris Russo (09:28): Yeah. I mean, look, I'll give you a wonderful, probably easy example here to think about what can you do with the information that you have that maybe you haven't acted on in the past. Airlines will sign deals with suppliers to guarantee some amount of fuel that they will have over the next 12 or 24 months. And I'm not even talking about hedging or anything more complicated. I'm just talking about that they have enough supply at the different airports that they need. But in those contracts, there are always terms and conditions around optionality. Hey, if I don't pick up this much, I can save some money or if I need more. There's all these little things that can get inserted that oftentimes the airlines forget about. The contract is signed, it's stored away somewhere in a digital file cabinet, and they're not really looked at anymore.
(10:20): And then when things happen in the market that change, different forces are at play, you may have different levers within those contracts that could potentially help you acquire more at a better price or otherwise move product. Maybe you don't want to pick it up for your Los Angeles market or if you're KLM, maybe not in your Amsterdam market, but in another location that's important. But if you don't remember those terms and conditions and those little optionalities, you forget that you have those choices. And so who's rereading the contracts? How is that information being bubbled up to you so that your fuel management team can make the choices? So that is an example. And there's lots of little examples like that. Again, through that chain that I was talking about where airlines, if they had a better grasp of that information, that data that could be analyzed and presented to them, just little things here that we're talking about that ultimately, Karen, could save them one to three to four cents a gallon.
(11:22): And boy, you might say, well, that's not a lot. One cent, two cents. I mean, that's nothing. But think about the billions of gallons that these larger legacy airlines consume. That starts to add up. So that's what we talk about maybe taking a more proactive approach where they're not fundamentally changing their fuel management departments, Karen, but they're just acting upon the information that may already exist to them, but they're just unable to bubble to the top.
Karen Walker (11:50): Right. So it is about being a little more strategic in how you approach how you acquire fuel and where best to use it and when. You mentioned the term hedging. Of course, that's a very big word in aviation where you're essentially guaranteeing ahead of time a certain price. And you're hoping that if there's a spike like there's been, you're going to be a winner because you're still paying a lower price. But there have been many examples of where you've hedged, the price comes down unexpectedly and then you are the only one paying higher prices. But at the moment, I don't think there are any U.S. airlines. There may be one or two, but most airlines are not in the U.S. anyway, not hedging anymore. Can you just make a comment about that? Will hedging come back in favor?
Chris Russo (12:43): Hedging will come back in favor if the CFOs believe that this volatility and uncertainty is going to last six, 12 months and beyond. Then you have to seriously consider, but that's the question. Now, when I talked to a couple of airline CFOs, and this was kind of at the beginning when this was all in March, April, and I asked them, "What will it take for you to think about and consider going back to hedging?" And they said, "Nothing right now." But here we are six months later. Things may have changed. And so you are correct here in the United States, there is no airline that hedges anymore because if you remember back in 2008 when the financial collapse happened, everyone was left holding the bag and prices went down precipitously and no one really wanted to do that. And so Southwest was the last one to get out of it in 2023.
(13:36): Now, there are larger European airlines. I believe Lufthansa is one of them, for example, and some Asian airlines that do hedge, and that is part of their strategy. And to be clear, when we talk about hedging, they're not hedging more than 20% of their total fuel. It's not like it's their entire thing and they're going to live and die by it, but it's just some semblance of price certainty in an era of uncertainty. So going back to these U.S. airlines, to start up a hedging program and hiring the right people and getting your systems in place and becoming in essence energy traders again requires time and a dedication to it. And are they there? But this is the million dollar question to me, Karen, literally millions of dollar question. Is hedging attractive enough for them to look to do it again?
Karen Walker (14:26): So you certainly seem to think it's a possibility that people are looking at it right now.
Chris Russo (14:31): Six months. Yeah, maybe four months ago, probably not, but we had no idea. But now that, as I said, we have these two issues, refinery and long-term inventory. It should give CFOs more pause to think about, hey, it may behoove us to do this, especially because, and I'm going to add this, for the U.S. and even in Europe, in some place in Europe, demand is still strong. So fuel prices are high. They're getting baked into the cost of the ticket, but demand is not waning. So people are still willing to pay these dollars, especially the premium dollars for the premium seats and experiences, that the airlines are not seeing anything, at least directly short-term, that gives them more pause that demand is going down. I really believe, Karen, demand is going to go down at some point. If these fuel prices keep going up, eventually it's going to hit some threshold where passengers will refuse to pay those prices, and now you're trapped in a real problem.
(15:33): So do you get ahead of it by trying to hedge in anticipation of some drop in demand? Just a thought.
Karen Walker (15:40): Very good though. Very interesting thought. Funnily enough, I was just talking a few days ago to the new head of the Asia Pacific Airlines Association, and he was saying, as you've just mentioned, that across Asia, demand is still really high. I think worldwide it still is. And that people, they understand, they read the news every day. So they're saying, of course, the airfares are higher because of this. But if that continues and they keep going higher and any sort of economic downturn comes down, it's affecting their own personal wealth, you're right. We'll get to a hit point where, and the first thing people then tend to do is cut the air travel.
Chris Russo (16:21): Correct. And I'm going to add this as well. So Scott Kirby came out, this was maybe four or five weeks ago, and very publicly said, "We do not expect our margins to be eroded in this year." Meaning when those fuel prices did start to come down four to six weeks ago, United was signaling to the market they were not going to cut their ticket prices because they wanted to make up for that margin increase that they had to spend on fuel. So you're also talking about airlines that are like, "If the fuel price goes down, we are not necessarily going to cut our airfare prices down right away so that they can make up for what they lost." That's
Karen Walker (16:59): Right. They've still got makeup.
Chris Russo (17:02): This is the game that I think you're going to see legacy airlines going to play. And I'm going to add one little piece to this too that you got to think about. No matter if you're in the U.S. or in Europe or in Asia Pacific, we'll call it the tier two airlines, your budget airlines, your low cost airlines. There is something to be said about the legacy carriers being in a little bit of a ways excited about high fuel prices because of what it can do to the market in eliminating the low cost carriers, i.e. Spirit Airlines, with airfare prices going up about 8% for those same routes for the different airlines when Spirit went down here. So you talk about eliminating your competition. That's actually a good thing. So there's the silver lining for your legacy carriers. I'm not saying that they wish ill, but let's be real.
(17:55): When it comes to business sense, the less competition, the better.
Karen Walker (18:00): Yeah, that's a very interesting thought. And in fact, that leads me to something that I was thinking as you were talking through all of this. If you can manage your fuel strategy better and be better prepared for this sort of thing, it gives you a competitive advantage, even against legacy versus legacy, depending on who's doing what, correct?
Chris Russo (18:22): Yeah. The short answer is yes. Anything that allows you to report better, stronger earnings to the streets obviously puts you in a better position for numerous different reasons. I mean, you look at here in the United States, United and Delta versus American Airlines and how their books have looked even over the last year. So it can become a competitive advantage when you can reduce your costs for fuel. And also by being smarter with fuel management, it open up your working capital, which means then you can spend more money on things like buying newer planes or investing in better customer experiences because you freed up money that you otherwise may have tied down to fuel. So it does become a competitive advantage. Absolutely.
Karen Walker (19:11): Right. So to really put you on the spot, what's the top line advice you'd give right now to airline CEOs and CFOs about fuel management strategy?
Chris Russo (19:23): Take a look right now, a good hard look at the macroeconomic conditions and ask yourself, do you believe that this uncertainty is going to last beyond nine to 12 months? If the answer is yes. Then the question becomes, what are you doing to empower and enable your fuel management teams to eke out every additional cent worth of savings? And it would be very inappropriate of me to say that these airlines are not doing anything around fuel management to improve. That is not the case at all. But are you leveraging tools like artificial intelligence? And are you leveraging it correctly to be able, again, to bubble up the information top of mind to the front of house to make better decisions? And how are you doing that? That will ultimately help figure out which ones of these airlines, when they come out for their quarterly earnings, will stand out stronger than their competitors.
Karen Walker (20:27): Wow. I know it's almost impossible to predict, Chris, but again, as you, and I know because you're in Houston, I believe. Is that right? So you are in Oil Central.
Chris Russo (20:38): It's very quiet here. There's nothing going on at all.
Karen Walker (20:42): And you of course are monitoring events there and in the Middle East and all that's going on. So I'm going to ask you again as the expert, where do you think things might stand by the end of this year and what should airlines most watch out for?
Chris Russo (20:57): Man, if I had my crystal ball right now and I could figure that out, I think I'd be taking this podcast from my own private island somewhere on this topic, but alas. These prices are going to get worse before they get better. And I truly and honestly believe that. By the end of this year, prices will go up. I'm reading left and right in publications to which I agree that if you're planning holiday travel, book it now. These prices are only going to get worse, but I think you're going to start to see more problems for these budget tier two airlines. They can only hold on for so long. I mean, here in the United States, the lobbying association for those tier two airlines, they are begging the Trump administration to pass that half of, is it, I can't remember, 500 million. It's a large sort of just emergency pot to help.
(21:53): It's going to get worse before it gets better. And this is going to cause a fundamental shift in the market longer term for which airlines survive. How do they move forward? And what does competition look like? So that is where I see if we were to reconvene Karen a year from now, probably fewer airlines in the marketplace. I think you're going to see fewer routes. I think you're going to see more full flights, even more full than we're already seeing them because they're cutting capacity, they're cutting routes. That's I think my prediction. So it's not all roses and peaches. I wish I could say that it would be, but it will get worse before it gets better. Sorry, I wish I had better news, but I think we just need to be frank and have an honest conversation so that people will make the best decisions that they can for it moving forward.
Karen Walker (22:44): Well, I'm not going to leave it a year before we reconvene, Chris, because this is just too interesting. And it's just, like I say, I know it's a huge challenge and difficult, but it's also very interesting to hear somebody talk through it the way you have done. So I'm going to make you come back and do a catch-up as this goes along, because there's always going to be something interesting going on here for quite a while. But Chris, thank you so much. Thank you to you and Publicis Sapient for your time and the insights. It's a very important and certainly topical topic, so thank you. Thank you also to our producers, Cory Hitt and Natalia Pelayo. And of course, a huge thank you to our listeners. We love having you on board. Subscribe to Window Seat on Apple Podcasts or wherever you like to listen.
(23:31): And so until next time, this is Karen Walker disembarking from Window Seat.
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