Oil prices wiping out airlines' gains

Cost of fuel is displacing labor as carriers' biggest expense

August 10, 2005|By KNIGHT RIDDER/TRIBUNE

PHILADELPHIA - Fares have risen and airplanes are full, but the price of oil is battering the airline industry, forcing carriers to devise ways to save on fuel.

The price of crude oil hit a record of almost $64 a barrel Monday, and traded just below that level yesterday, adding to the industry's burden at a time many airlines were making progress toward profitability by reducing other costs.

Several major airlines, including America West, American, Continental and Southwest, made money in the second quarter. But much of the profit they and other carriers traditionally expect to make in the vacation-heavy third quarter could be wiped out by high jet fuel costs, industry analysts say.

From January through May, average jet fuel prices ranged from $1.27 to $1.56 a gallon, or 34 percent to 57 percent more than they did in of 2004, the Air Transport Association says.

This month, airlines have paid as much as $1.75 a gallon for fuel on the spot market, analysts said. Each 1-cent increase in the per-gallon price costs airlines $180 million annually, the trade group figures.

"Until prices get down significantly from where they are now, the industry is going to continue to lose money," said David Swierenga, an economist with AeroEcon in Vienna, Va. "The losses are going to be around $5 billion this year."

The industry lost a total of $32 billion from 2001 through 2004. The higher fuel costs come as airlines have been filling more than 80 percent of their available seats, and fares, after four years of declines, have started to inch back up.

Roger King, the airline analyst at CreditSights in Norwalk, Conn., calculated that U.S. carriers paid about $17.3 billion for fuel last year but will shell out at least $8.5 billion more than that this year.

"That's money out the door," he said.

Biggest expense

The rise in fuel costs means that several major carriers, including US Airways, America West, AirTran and JetBlue, are paying more to fuel up planes than they are for labor. Traditionally, labor has been an airline's biggest single expense, with fuel in second or third place. But that has changed because of lower pay rates and benefits imposed on many airline employees in recent years.

"If there's good news, it's that high fuel costs happened to come when the airlines were pointing all the needles in the right direction of lower costs," said Kevin P. Mitchell, chairman of the Business Travel Coalition in Radnor, Pa.

But not all airlines are suffering equally.

Southwest, the dominant carrier at Baltimore-Washington International Airport, has made money consistently over the past four years in part because it could afford to hedge, or buy advance-purchase contracts, saving it huge sums. The airline spent almost $200 million less on fuel in the second quarter, compared with a year earlier, and said that it was 85 percent hedged at $26 a barrel for the last half of the year.

That bottom-line advantage, as far as it goes, will continue; Southwest will be able to buy 25 percent of its fuel for 2009 at $35 per barrel.

At the other end of the spectrum, shares in Delta Air Lines plunged 28 cents, or 12.6 percent, to $1.95 yesterday on the New York Stock Exchange after a Wall Street analyst, Michael Linenberg of Merrill Lynch & Co. Inc., predicted that fuel costs would help push the No. 3 carrier into a Chapter 11 bankruptcy filing within two months.

Linenberg estimated that Delta's fuel bill this year could grow by more than $1 billion, wiping out the $1 billion of cost concessions it got from employees in the past year.

Hedge contracts

America West, which plans to merge with US Airways this fall, said in its second-quarter report that it saved money by hedging 58 percent of its fuel expense, but its costs still were 44 percent higher than in the corresponding period last year. US Airways paid 57 percent more for fuel in the second quarter than it did in 2004; the fuel-hedging contracts it had were wiped out when it filed for Chapter 11 bankruptcy protection Sept. 12.

America West has implemented half a dozen new procedures in recent months to cut down on fuel use, spokesman Philip Gee said.

Among the practices, which US Airways and other carriers also follow, are using just one of a jet's engines to taxi to and from runways; buying as much fuel as possible at airports where prices are lower; reducing the amount of fuel carried on a flight, to cut weight; working with air traffic controllers to find the most direct routes to a destination; and installing devices on wings that save fuel by reducing drag.

When America West announced May 19 that it intended to merge with US Airways, Chief Executive Officer Douglas Parker said his enlarged airline could make money with oil at $50 a barrel.

But analysts say that if the cost stays above $60 a barrel for a sustained period, almost no carrier can make money.

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