In JetBlue Airways' (JBLU +0.21%) third-quarter conference call, CEO David Barger explained that "we're obviously happy with the recent decline in fuel prices and expect to benefit from it." Fuel is JetBlue's largest expense, so oil prices falling from over $100 a barrel to below $60 is likely to have a big impact on the airline's margins. However, the cheaper jet fuel gets, the less reason there is to spend on the environmentally-friendly fuels made by companies such as Solazyme (SZYM +0.00%) and Amyris (AMRS +0.00%).
How important is jet fuel?
Jet fuel made up roughly 37% of JetBlue's costs in the third quarter. So being happy about falling oil prices, which leads to lower jet fuel costs, is really an understatement. And since oil has only fallen further since the third quarter ended, look for more benefit in the fourth quarter and into early next year.
Source: Eddie Maloney, via Wikimedia Commons.
However, expensive oil has been a boon for more than just oil companies. For example, alternative fuels can be expensive, and as such, are better able to compete when oil prices are high. When oil prices fall, interest can slacken in pricey alternative fuels. Solazyme and Amyris are staring down that barrel right now.
For example, Alaska Air Group (ALK +0.51%) test drove biofuels on commercial flights in 2013. But, according to the company, "The 28,500 gallons of fuel cost nearly six times more than conventional 'Jet A' aviation fuel, or about $17 a gallon, because no large, stable supply of biofuels exists yet." For comparison, both Alaska Air and JetBlue expect to pay about $2.80 a gallon for jet fuel in the fourth quarter.
Algae and sugar cane get shoved to the side
In this context, it's no wonder that biofuel makers Amyris and Solazyme have seen their shares fall right along with the price of oil.
That said, they both do pretty interesting things. Solazyme, for example, uses algae to produce biofuels and other oils and products. Its customers include the U.S. Navy, Department of Defense, and food manufacturers. Its business is broader than just fuel, which is a good thing right now. In fact, its food business recently saw the launch of eight consumer products that include Solazyme-produced ingredients, including a nondairy creamer and gluten-free baked goods.
That success, however, does nothing to offset the fact that Solazyme has yet to make an annual profit as a public company. Since breaking into the fuel market, jet and otherwise, is a major part of the opportunity here, falling oil prices are a big roadblock.
Amyris is a little less exciting. It uses sugar cane to make a fuel called farnesene. Brazilian discount airline GOL used a mixture of 10% farnesene and 90% jet fuel on a recent flight between Florida and São Paulo. The interesting thing here isn't what this fuel is made of, but where it is made -- Brazil. That country, the world's largest producer of sugar cane, has plenty of the feedstock and a large infrastructure supporting ethanol, a similar biofuel. Amyris CEO John Melo believes these facts will help materially on the cost side.
However, cost is still a big impediment. While Melo explained to The New York Times earlier in the year that he believes cost issues can be overcome in three years or so, falling oil prices make it harder to close the gap. And, like Solazyme, Amyris has yet to turn an annual profit. How much time and money the market will give a money-losing company trying to break into an established market with a new product is always a tough question. And when that market is getting even tougher to break into, investors can get stingy fast.
Now what?
Falling oil prices are far from a death blow to either company, since there are other reasons companies and countries could want biofuels, including fuel diversity and security. Neither of those very good reasons, however, mean there's a truly viable commercial market for biofuels. And declining oil costs certainly make this pair's lives a lot harder right now, the exact opposite of what is happening at the airlines. As long as oil prices are weak, look for earnings troubles to continue at Solazyme and Amyris. Investors should think long and hard about whether to keep funding money-losing product development in the face of this major headwind.
