DHS shutdown impact: Former United Airlines CEO Oscar Munoz on the disruption to travel
Speakers
Becky Quick — CNBC Anchor
— CNBC Squawk Box host
Summary
- The ongoing DHS shutdown is forcing TSA agents to work without pay, which could lead to severe airport delays and forced flight capacity reductions if agents seek alternative employment.
- Despite the operational friction, consumer demand for travel currently remains high.
- Jet fuel prices have surged dramatically from historical norms of $2.00/gallon to $4.12/gallon, driven by rising crude oil and expanding refining crack spreads.
- This fuel price spike is estimated to cost the airline industry over $10 billion, forcing airlines to implement fuel surcharges and raise ticket prices to recover costs.
Trade Ideas
"The refining spread or crack spread is what's really gotten out of control... fuel is maybe $2 a gallon... it's 4.12 as of Friday... That kind of price trick is going to cost the industry ten plus billion dollars." Airlines are facing a massive $10B+ cost headwind from surging jet fuel prices. Simultaneously, the DHS shutdown threatens to force capacity reductions (fewer flights) if unpaid TSA agents quit. While airlines are raising ticket prices to compensate, the combination of higher fares, longer lines, and reduced flight availability will likely destroy consumer demand and severely compress airline profit margins. SHORT. The confluence of skyrocketing operational costs (fuel) and forced capacity constraints creates a highly unfavorable environment for airline equities. The DHS shutdown resolves quickly, oil prices retrace, and consumers absorb the higher ticket prices without reducing their travel frequency.
"The crude oil is one thing. The refining spread or crack spread is what's really gotten out of control." Crack spreads represent the profit margin refiners make by converting crude oil into refined products like jet fuel. If crack spreads are "out of control" and jet fuel prices have doubled to over $4.00 a gallon, independent refiners are capturing massive windfall profits at the expense of end-users like the airlines. LONG. Refiners are the direct financial beneficiaries of the widening crack spreads and elevated jet fuel prices highlighted by the speaker. A sudden drop in global travel demand due to high ticket prices or a resolution to geopolitical conflicts could cause crack spreads to rapidly collapse.
