Jet Fuel

Definition

Jet fuel is a type of aviation fuel used to power jet engines in aircraft. It is a complex mixture of hydrocarbons derived from crude oil, designed to provide the necessary energy density and combustion properties for efficient and reliable jet engine operation.

5 Must Know Facts For Your Next Test

1. Jet fuel is the largest operating expense for most airlines, accounting for up to 30% of their total costs.
2. The price of jet fuel is closely tied to the price of crude oil, as it is a refined petroleum product.
3. Jet fuel is classified into different grades, such as Jet A and Jet A-1, based on their specific properties and performance characteristics.
4. The volatility in jet fuel prices can have a significant impact on the profitability and financial stability of airlines and other businesses that rely on air transportation.
5. Governments and regulatory bodies often intervene in the jet fuel market to ensure supply security and price stability, particularly during times of market disruptions.

Review Questions

• Explain how the price of jet fuel can impact the profitability and operations of airlines.
  • The price of jet fuel is a major determinant of an airline's operating costs, as it can account for up to 30% of their total expenses. Fluctuations in jet fuel prices can significantly impact an airline's profitability, as they may not be able to fully pass on these increased costs to their customers through higher fares. This can lead to reduced profit margins, the need to cut costs in other areas, and even threaten the financial viability of the airline. Volatility in jet fuel prices also makes it challenging for airlines to accurately forecast and budget their fuel expenses, which can disrupt their operational and financial planning.
• Describe how businesses can use hedging strategies to manage the commodity price risk associated with jet fuel.
  • Businesses that rely on jet fuel, such as airlines, can use hedging strategies to manage the commodity price risk associated with fluctuations in jet fuel prices. One common hedging technique is the use of futures contracts, where the business can lock in a fixed price for jet fuel at a future date. This allows them to mitigate the risk of unexpected increases in jet fuel prices, which can have a significant impact on their profitability and operations. By using these financial instruments, businesses can stabilize their fuel costs and improve their ability to plan and budget effectively, even in the face of volatile jet fuel markets.
• Analyze the role of government intervention in the jet fuel market and its impact on supply security and price stability.
  • Governments and regulatory bodies often play a key role in the jet fuel market, particularly in ensuring supply security and price stability. This is because disruptions in the jet fuel supply or significant price fluctuations can have far-reaching consequences for the broader economy, as jet fuel is a critical input for the aviation industry and other transportation sectors. Governments may intervene through various policies, such as strategic fuel reserves, production quotas, or price controls, to mitigate the impact of market disruptions and maintain a stable and reliable supply of jet fuel. These interventions can help to reduce the volatility in jet fuel prices and provide a more predictable operating environment for businesses that rely on this commodity, ultimately supporting economic growth and development.

Related terms

Commodity Price Risk:

The risk of fluctuations in the market price of a commodity, such as jet fuel, that can impact the profitability and operations of businesses that rely on that commodity.

Hedging:

The practice of taking an offsetting position in a related asset to manage the risk of adverse price movements, such as using futures contracts to hedge against increases in jet fuel prices.

Supply Chain: The network of organizations, resources, and activities involved in the production, distribution, and delivery of a product, like the global supply chain for jet fuel.