Persian Gulf crisis threatens airline industry

HIGH-FLYING JET FUEL PRICES

December 17, 1990|By Tom Belden | Tom Belden,Knight-Ridder News Service

Airline travelers and those who pay their bills have watched with alarm this fall as the Persian Gulf crisis seemed to move steadily toward war.

The conflict has sent oil prices up, but prices for jet fuel have soared far more than have gasoline prices. That, in turn, has caused not only higher air fares -- they are up an average of almost 18 percent since summer -- but also a financial crisis for the airline industry, which already was experiencing a drop in business because of the economy.

The airlines' financial situation has become so serious -- with losses expected to top $1 billion in the fourth quarter -- that diminished competition and still higher fares could result, industry officials and analysts say.

Eastern Airlines has been operating under bankruptcy court protection since March 1989. Midway Airlines, citing the sharp uptick in fuel prices, abandoned efforts this fall to expand at Philadelphia International Airport. Pan American World Airways, which has been suffering financially for years, sold off some crown jewels -- its North America-London routes -- to United Airlines to raise cash.

Other airlines, including some that analysts say have good long-range futures, have laid off employees or frozen hiring in the last few months.

Last week, Continental Airlines sought refuge in bankruptcy court, blaming high fuel costs on top of a mountain of debt.

"I don't think there's any question that several airlines are in real danger," said Earl Gaskins, vice president of Provident Capital Management Inc. in Philadelphia.

If several more airlines fail or are forced to significantly curtail operations, a long-standing prediction by critics of a completely deregulated airline industry will be fulfilled. Noting that 90 percent of the industry's profits last year were made by just American, Delta and United, they say the entire business would come under the control of an oligopoly of just four or five big players.

"We're witnessing the long-overdue shakeout of the airline industry, and the result is going to be less competition," said Paul Stephen Dempsey, a University of Denver law professor and one of the harshest critics of airline deregulation.

Last week, with the price of crude oil dropping on improving news from the Mideast, the price of jet fuel, just like the price of gasoline, showed no signs of coming down any time soon.

Despite repeated protests from the airlines, the price of jet fuel since early August has consistently stayed above the price of gasoline. Before then, jet fuel had usually cost less than gas. Jet fuel reached its most recent peak in early October, when it jumped to $1.40 a gallon, 75 cents more than about 2 1/2 months earlier.

Prices have moderated since that peak. But from August through November, jet fuel increased an average of 29 cents a gallon, compared with average rises of 11 cents a gallon for gasoline and 23 cents a gallon for home heating oil. During the same period, West Texas Intermediate crude, the benchmark domestic oil, rose 19 cents a gallon.

Airline officials say they have received no satisfactory answers from the oil industry about the boost in prices for jet fuel.

The most logical answer is simply that there are 100 million American motorists who notice gas-price increases every time they fill up, but that there are only 20 major buyers of jet fuel, said Ed Merlis, vice president for policy and planning at the Air Transport Association, which represents the nation's major airlines.

The White House has sent a message to the oil industry that it would look dimly on any price-gouging of motorists when it was sending troops to the Mideast to defend U.S. interests, including future oil supplies, Merlis suggested.

"I think the president's jawboning has been very effective on gasoline," he said. "At times the price of gasoline has gone down while the price of crude oil was going up."

Other factors that have helped push up jet-fuel prices, Gaskins of

Provident Capital Management noted, are the removal of Kuwait's capacity to produce gasoline and jet fuel and a buying spree by Japanese traders just as prices started to go up, a move that tied up supplies.

Executives of the major airlines, in the meantime, are divided over what to do about fuel prices. Some, including Pan Am Chairman Thomas Plaskett, have called for more regulation of the oil-futures market. Others support tapping into the national Strategic Petroleum Reserves to increase the amount of oil on the market, even though there are ample supplies of crude.

"I don't think any carrier would oppose government action," Merlis said. "They just don't want to propose it because it goes against their grain, against the grain of the free market."

For consumers, about the only bright spot is the possibility that a recessionary economy, coupled with the airlines' financial troubles, could mean more price-discounting in coming months. But that does not mean that base airline fares, the kind business travelers often have to pay, will be coming down, analysts said.

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