Minimizing Cost Risk Through Hybrid-Electric Operations: Analyzing the Relationship between Airline Profits and Oil Prices

Air carriers operate in highly competitive markets, with tight profit margins and high sensitivity to cost variability. Jet fuel costs have historically been one of the highest components of air carrier operating costs, accounting for upwards of 30% of costs. Moreover, jet fuel prices are inherently volatile, governed by the global oil market. This study examines the relationship between air carrier profitability and jet fuel prices to quantify the impact and importance of fuel price volatility on air carrier profits. Using publicly available data on commercial airline operating profits from the U.S. DOT’s Bureau of Transportation Statistics, a vector autoregression (VAR) is estimated to empirically measure the impact of oil price shocks on profits using impulse response functions and variance decomposition statistics. The VAR analysis shows that a one standard deviation increase in oil prices substantially impacts airline profits negatively over an initial four-quarter period, potentially causing operating losses for an airline. The study goes on to compare historical and forecasted price variation between jet fuel and electricity energy sources, while accounting for differences in powertrain conversion efficiency between conventional jet fuel and hybrid-electric systems. Historically, electric energy is far more stable than jet fuel, with forecasted prices showing clear advantages for electrical energy depending on the generation source. Given the sensitivity to fuel price volatility, future hybrid-electric aircraft have the potential to minimize cost risk to airlines through energy diversification.