CHICAGO (S&P Global Ratings) Sept. 15, 2023-- Although several U.S. airlines recently revised down their earnings expectations for third-quarter 2023, S&P Global Ratings does not anticipate a meaningful change to our forecasts. The airlines' revision comes mainly in response to higher-than-expected jet fuel costs, which have appreciated significantly over the past few months. Prices are close to $3.20/gallon (on average for the week of Sept. 3-9, 2023) due to higher crude oil prices and crack spreads--an increase of roughly $1/gallon since May.
In contrast, our fuel price assumptions for 2023 have remained higher and more conservative than the airlines' this year. Effectively, our forecasted credit measures incorporated a degree of downside cushion to withstand the recent appreciation in prices. As such, the recent uptick in fuel prices has an overall limited effect on our estimates for now. Passenger demand also remains favorable following a very strong summer travel season.
Still, sustained, higher jet fuel prices remain a downside risk to our forecasts, particularly if not accompanied by higher fares. While we do not anticipate meaningful changes to our forecasts for large network carriers like American Airlines, Delta Air Lines, and United Airlines, we believe certain smaller, lower-cost carriers could face heightened pressure on profitability and credit measures. We view the demand environment for these airlines as relatively less favorable, due mainly to limited or no international exposure that is driving near-term growth for network carriers. While we apply similar fuel price assumptions across the U.S. industry, there is generally less capacity for lower-rated airlines to absorb higher-than-expected costs.
We rely on crude oil price forecasts from S&P Global's energy team and crack spreads imputed from certain industry sources for our fuel price assumptions. Airlines generally use forward curves that are heavily influenced by prevailing spot prices in their planning process. We acknowledge the unpredictability of fuel prices in our ratings, and our assumptions for 2023 are unchanged. Apart from Southwest Airlines, larger carriers typically do not hedge fuel; Delta generates a modest net benefit from its refinery sales.
We expect airlines will continue to mitigate the effect of higher fuel prices by passing on much of their exposure to customers. That said, this dynamic could become more challenging if fuel prices continue to increase from current levels given already high passenger airline fares (on a nominal basis) and slowing rate of expansion we assume for next year.
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analyst: | Jarrett Bilous, Toronto + 1 (416) 507 2593; jarrett.bilous@spglobal.com |
| Secondary Contacts: | Betsy R Snyder, CFA, New York + 1 (212) 438 7811; betsy.snyder@spglobal.com |
| Annapoorni CS, CFA, New York +1 (212)-438-0607; annapoorni.cs@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.