Rising oil costs add to airlines' burdens

Gallon of jet fuel that cost 69 cents in 2001 goes for $1.03

March 18, 2004|By Robert Manor | Robert Manor,CHICAGO TRIBUNE

As if it wasn't suffering enough, the airline industry has yet another affliction - rising jet fuel costs that further threaten the industry's recovery.

Yesterday, the price of jet fuel in Chicago reached $1.037 a gallon. Two years ago, before the war in Iraq and the surge in oil prices, that same gallon sold for 69 cents.

Industry analysts say the price of commercial airliner jet fuel, a kind of kerosene, closely tracks the price of petroleum. One benchmark grade of oil peaked above $38 a barrel yesterday, its highest price in 13 months.

"Jet fuel prices are very highly correlated with crude oil prices," said Chris Lozier, an airline analyst with Morningstar. "It's been tough on the airlines."

Last year, when oil prices were also high, United Airlines spent $2 billion on fuel, its second biggest expense after payroll.

"Every one cent price increase in the average annual price will impact our fuel costs by $22 million a year," said Jeff Green, a spokesman for United.

And even compared to an oversized SUV, passenger aircraft are prodigious drinkers of fuel.

For example, United says that on a flight from Chicago to Los Angeles, a 777 is likely to consume 7,514 gallons of jet fuel. The same plane bound from Chicago to London will go through 14,676 gallons.

Airlines have two options when fuel prices surge.

They can raise prices and risk losing passengers.

Or they can try to hedge their losses by buying futures or options that rise in value when crude oil goes up. But many airlines say they skip hedging because it is expensive.

"We have historically hedged," said Mary Frances Fagan, a spokeswoman for American Airlines.

Still, American said in a filing yesterday that it revised its fuel cost forecast to 99 cents per gallon from 87 cents per gallon. One analyst said he now expects American to lose money in 2004 rather than turn a profit, as previously predicted.

Furthermore, as oil prices approach record highs, some on Wall Street believe more carriers will lose money this year instead of turning a profit.

United Airlines, for one, does not hedge on oil prices and could not if it wanted to. United is in bankruptcy and is not considered a reliable counter party for a hedging arrangement, according to a source familiar with the matter.

And earlier this week, Delta Air Lines proved that hedging only cuts losses, it usually doesn't eliminate them.

The airline blamed "sustained higher fuel prices and costs associated with the settlement of fuel-hedge contracts" for a loss of $47 million.

In recent years the airline industry has tried adding a fuel surcharge to fares when oil prices surge. American Airlines, for example, said it added a $20 surcharge to some - but not all - roundtrip flights, and United has a similar surcharge.

"The public really doesn't see the surcharge," said Terry Trippler, president of CheapSeats.com. That is because travel agents and airlines typically lump together all fees and taxes when they quote the fare for a flight.

But the Internet has made it more difficult for airlines to add or maintain a surcharge, Trippler said.

"Most travel sites list fares from cheapest to most expensive," Trippler said. Anyone using a Web-based service to buy a ticket can easily find the most economical fare, and that is likely to be the one without a fuel surcharge.

The Chicago Tribune is a Tribune Publishing newspaper.

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