Fuel cost is running the economy in U.S.

Energy: Companies big and small, especially in transportation, seek ways to deal with the rising price of crude oil and its refined products.

August 21, 2004|By James F. Peltz | James F. Peltz,LOS ANGELES TIMES

As United Parcel Service Inc.'s army of 74,000 domestic drivers make their daily rounds, they share a marching order from headquarters: Shut your engines.

"You will never see a UPS truck idling" at a drop-off point, "even if it's going to be in your driveway for only 30 seconds," spokesman Norman Black said. The driver, he added, "is taught to turn it off."

That is one of several ways the Atlanta-based shipping giant tries to save fuel and corral its soaring energy costs. But they haven't been enough. In the second quarter, Big Brown spent $320 million on fuel -- an increase of $71 million, or 29 percent, from a year earlier.

Like UPS, companies big and small are struggling to cope with skyrocketing prices for crude oil and its refined products: gasoline, diesel fuel and jet fuel. The situation is especially acute for the fuel-reliant transportation industry.

Consumers also are feeling the pinch of higher pump prices, which leave them with fewer dollars to spend elsewhere. Although average gasoline prices nationwide have fallen from record peaks reached in late May, they remain 30 percent higher than a year ago, federal surveys show.

As fuel prices have risen this year, they have created a drag on the U.S. economy. The Federal Reserve Board's policy-making arm, in lifting short-term interest rates last week, said the economy's growth had slowed because of "the substantial rise in energy prices."

The central bank expects stronger expansion ahead. But U.S. industry has a problem right now, with oil for September delivery reaching a record $49.40 a barrel yesterday on the New York Mercantile Exchange before retreating to $47.60.

The airline industry had hoped that 2004 would be the year it recovered from its post-Sept. 11 tailspin. Instead, many of the carriers "are just getting crushed" by rising jet fuel costs, said Paul Stebbins, chief executive of World Fuel Services Corp., which helps companies develop fuel strategies.

Fuel accounts for 10 percent to 15 percent of an airline's operating costs, second only to labor expenses. And the market price of jet fuel has surged 52 percent in the past 12 months, to $1.267 a gallon from 83.3 cents.

Several large, conventional carriers such as UAL Corp.'s United Airlines and Delta Air Lines Inc. were in dire financial straits before this year. Higher oil prices are "the added insult to the injury," Stebbins said.

Airlines, truckers and shipping companies try to defray the high costs by using financial trading strategies that hedge their fuel expenses and, where possible, slapping fuel surcharges on customers' bills.

Hedging effectively enables them to lock in prearranged prices for fuel, so that they are not hurt if prices jump above those levels. For instance, Burlington Northern Santa Fe Corp., one of the major railroads, has more than 50 percent of its diesel fuel needs hedged through next year, spokesman Richard Russack said.

Even with hedging and extra revenue from surcharges, the Fort Worth, Texas-based railroad expects its third-quarter fuel bill to leap 26 percent from a year earlier, to $335 million.

Discount carrier Southwest Airlines Co. also hedges extensively, with about 80 percent of its fuel needs for the next two years locked in at prices below current market levels. But prosperous airlines such as Southwest are better able to hedge because it requires substantial cash up front.

Some distressed airlines -- needing the money for other expenses -- have less than half of fuel requirements hedged, leaving them more vulnerable to high market prices. Delta has no hedges in place, and in the second quarter its fuel costs soared 54 percent from a year earlier, to $669 million from $435 million.

What's more, unlike some industries, the airlines struggle to impose fuel surcharges on travelers. Carriers that try usually withdraw the fees on certain routes if their rivals don't match them. With fare competition intense, no airline wants to stand out with a higher fare and lose even a bit of market share.

Continental Airlines Inc., for one, has tried all summer to add a $10 fuel fee to each one-way ticket. But on routes where competitors haven't added the same surcharge, the Houston-based carrier has scrapped the plan.

Large trucking companies and major shipping companies such as UPS and FedEx Corp., which have long-term accounts with big companies, have had more success making surcharges stick. Plus, their fees fluctuate with fuel prices, which means "less of an impact" on profit, said Ryan Furby, a spokesman for Memphis, Tenn.-based FedEx, which has a fleet of 71,000 vehicles and 645 planes.

Times staff writers Julie Tamaki, Dawn Wotapka and the New York Times News Service contributed to this article. The Los Angeles Times is a Tribune Publishing newspaper.

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