[Get out your calculators]
How is it possible that all five of the major US airlines were unprofitable last quarter – while Air China managed to see its profits climb 147%, to RMB 1.04 billion (US$149 million)?
There were undoubtedly a range of factors at play, but the one that I’d like to touch on – because it highlights other issues – is the price impact of China’s subsidized jet fuel.
In the first quarter, Northwest Airlines experienced a 49.7% increase in its jet fuel costs, compared to last year; Delta, similarly, faced a 50% increase in its fuel costs. Of course, Air China must buy fuel, too. But unlike the US carriers, Air China is shielded – somewhat – from global price trends by China Aviation Oil Corporation [CAOC] which sets Chinese jet fuel prices. And it sets them, generally, below the prices paid on the open market, or by aggressive hedgers like US airlines.
This should come as a surprise to nobody. China subsidizes most fuel prices. But what’s interesting about jet fuel is that the consumers are often publicly-held companies, and thus – in this case, at least – it’s possible to get a vague sense of the advantage conferred by that price-regulated subsidy on a specific industry.
So – how much of an impact did that jet fuel subsidy make in the last quarter? Northwest Airlines paid US$2.77/gallon for jet fuel in the last quarter; Delta paid US$2.85/gallon (less successful hedges, apparently). Meanwhile, thanks to government price controls, Chinese kerosene jet fuel prices were fixed at RMB 6180 mt, which works out to RMB 18.57 per gallon (332.7 gallons in 1 mt of kerosene jet fuel). Currency fluctuations make a precise dollar value difficult to fix. So, to keep things simple, let’s take a rough but generous average on the dollar exchange with the RMB in the 1st quarter (between 7.2 and 7.0) and say that Air China’s average fuel cost was US$2.60/gallon, giving it a net savings of US$.17 and US$.25 on Northwest and Delta respectively.
According to Boeing, the standard 747-400 has a maximum fuel capacity of 57,825 gallons – meaning that it was US$9,830 cheaper for Air China to fuel that plane than for Northwest to fuel it; and US$14,456 cheaper than Delta.
Now, consider that both Delta and Northwest purchase hundreds of millions of gallons of kerosene jet fuel per quarter – and you’ve got net savings (and a competitive advantage for Chinese carriers) that totals in the tens of millions of US dollars. That’s not enough to account for their total losses (or profits, in Air China’s case), but it would certainly narrow the margins if all things were equal.
[Question: does anybody out there know the price of kerosene jet fuel for US airliners refueling in China? Do they pay a spot price? Or the subsidized price? If the former – there’s a WTO complaint if I ever saw one.]
And Chinese jet fuel is becoming cheaper. On April 1, CAOC dropped the price of kerosene jet fuel by RMB 80 (US$11.42). While, presumably, it’s becoming more expensive for US carriers.
Of course, the subsidy isn’t the only advantage at play for the Chinese airlines. Because of the appreciating yuan, and the depreciating dollar, China carriers which fly international routes to the US, and need to refuel there, have been acquiring an ongoing favorable discount on the purchase of fuel in the US since the yuan was un-pegged from the dollar.
Let me wrap this up with a couple of quick points. First, I’m writing this for my blog, so the math is not going to be as tight as if I was doing this for a fact-checked magazine. If somebody has better calculations, please keep that in mind, and then share the calculations. Also, I fully acknowledge that I haven’t accounted for fuel taxes in this post. They might make a difference; they might not. I don’t know – but if someone does, please let me know.
And finally, in fairness, the US airlines industry is one of the most subsidized and pampered group of companies in North America. Especially Northwest/worst. However, their subsidies tend to be of the structural variety, and not of the operational sort favored in China.