Jet Fuel

Jet fuel (also known as 'aviation turbine fuel') is the lifeblood of modern aviation. It's a specialized, high-quality type of kerosene-based fuel used to power aircraft with gas-turbine engines—think of every commercial airliner, cargo plane, and private jet you see streaking across the sky. The most common types you'll hear about are Jet A, used primarily in the United States, and Jet A-1, the standard across the rest of the world. From an investor's perspective, jet fuel isn't just something that gets planes from A to B; it's a critical economic barometer and a massive operating expense that can make or break the profitability of airlines and logistics companies. Its price ripples through the global economy, affecting everything from the cost of your vacation ticket to the speed at which a package arrives at your door. Understanding the forces that move jet fuel is essential for anyone looking to invest intelligently in the transportation sector.

So, why should a value investor care about a refined petroleum product? Because jet fuel prices are a major driver of costs and, therefore, profits for a whole slice of the economy. For the airline industry, fuel can easily represent 20-30% of total operating expenses. A sudden spike in jet fuel prices can wipe out an airline's profits, while a sustained drop can provide a powerful tailwind. However, the story is more complex than “high fuel prices = bad for airlines.” It's about volatility and predictability. Companies that can manage this key cost effectively, either through shrewd purchasing, operational efficiency, or financial hedging, often demonstrate superior management and a more resilient business model. For a value investor, analyzing how a company handles its energy costs is a fantastic window into its operational discipline and long-term viability. Furthermore, the price of jet fuel is a direct reflection of global economic activity. Rising demand for air travel and cargo points to a healthy, growing economy, while falling demand can be an early warning sign of a slowdown.

The price you see for jet fuel isn't arbitrary. It's a cocktail of global forces, refinery economics, and basic supply and demand.

The single biggest component of jet fuel's price is the cost of its raw ingredient: crude oil. As a general rule, when crude oil prices go up, jet fuel prices follow, and vice versa. Investors closely watch the main global benchmarks for crude oil, West Texas Intermediate (WTI) and Brent Crude, as they provide the baseline for all refined products. A geopolitical flare-up in the Middle East or a policy decision by OPEC+ that sends crude soaring will almost certainly lead to higher jet fuel costs within weeks.

The price of jet fuel isn't just the price of crude oil. The process of “cracking” crude oil into lighter, more valuable products like jet fuel, gasoline, and diesel at oil refineries has its own economics. The difference between the price of a barrel of crude oil and the price of the products refined from it is called the crack spread. This spread represents the gross profit margin for an oil refiner. A wide crack spread is fantastic news for refiners—it means they are getting paid handsomely to turn crude into fuel. A narrow spread can squeeze their profits. For investors, monitoring the jet fuel crack spread can provide clues about the profitability of refining companies and the balance of supply and demand for jet fuel itself.

• Demand: The demand side is easy to understand. More people flying for holidays and business means more planes needing fuel. A booming e-commerce market means more cargo planes in the air. The COVID-19 pandemic provided a historic lesson in demand destruction, as grounded flights caused jet fuel demand to plummet.
• Supply: The supply is determined by the output of oil refineries. A refinery might shut down for maintenance (especially before a peak season like summer), or a natural disaster like a hurricane could knock a major refining hub offline. These events can temporarily restrict the supply of jet fuel, causing prices to spike even if crude oil prices remain stable.

Directly trading physical jet fuel is the domain of large commodity trading houses, not the average investor. However, there are several excellent indirect ways to gain exposure, all of which can be analyzed through a value investing lens.

1. Airlines: The most direct, but also riskiest, way to play jet fuel prices. Lower fuel costs can significantly boost profits, but the airline industry is notoriously competitive with thin margins. A value investor must dig deeper, looking for airlines with strong balance sheets, rational management, and a durable competitive advantage (a rare thing in this sector).
2. Oil Refiners: These companies profit from the crack spread. If you believe demand for travel and transport will remain strong, refiners can be a great investment. Look for efficient operators in strategic locations with a history of rewarding shareholders.
3. Integrated Oil & Gas Companies: Giants like ExxonMobil, Shell, and Chevron are involved in the entire process, from pulling crude out of the ground to refining and selling the final products. They offer broader energy exposure than pure-play refiners.
4. Air Freight & Logistics: Companies like FedEx and UPS operate massive fleets of cargo aircraft and are huge consumers of jet fuel. Their profitability is also sensitive to fuel prices, but they often have more power to pass these costs on to customers through fuel surcharges.

Before investing in a company heavily influenced by jet fuel, ask yourself these questions:

• Hedging Policy: Does the company use financial instruments to hedge against fuel price volatility? A smart hedging program can smooth out earnings, while a poorly executed one can lead to massive losses.
• Operational Efficiency: Is the company investing in newer, more fuel-efficient aircraft or refining technology? In the long run, efficiency is the best defense against high prices.
• Balance Sheet Strength: Can the company withstand a period of high fuel prices without jeopardizing its financial health? A strong balance sheet provides a crucial margin of safety.
• Long-Term Trends: What is the company's strategy for the transition to Sustainable Aviation Fuel (SAF) and other green technologies? The future of fuel is changing, and investors should back the companies prepared for it.