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.
