Refining of jet fuel is costing a bundle

Record prices near value of barrel of oil

September 30, 2005|By DALLAS MORNING NEWS

DALLAS -- Airlines already crumbling under crude oil prices face another major expense: the record-high cost of turning crude into jet fuel.

Since hurricanes Katrina and Rita idled much of the Gulf of Mexico's refining capacity, most U.S. airlines have been paying an extra premium to refine or "crack" the oil into kerosene-like jet fuel.

In July, before the storms, airlines paid the equivalent of $11 per barrel of crude in addition to the spot price to keep planes aloft.

Now the "crack spread" has spiked to nearly $59, meaning it costs nearly as much to refine the jet fuel as it does to buy a barrel of crude. The price of crude rose yesterday to $66.79 a barrel.

"We're just in a classic inventory crunch," said David Freyman, vice president of Barnes and Click Inc., a Dallas energy consultant. "At some point, we're possibly going to see some spot outages."

Domestic refineries are geared toward making gasoline and diesel fuel, with jet fuel coming in a distant third. Gulf refineries produce about half the nation's jet fuel; many of the hurricane-damaged refineries won't restart for days, and it may be several weeks before they reach normal capacity. "These things can't be turned on like a light switch," Freyman said.

The spike in refining costs comes at the worst possible time for airlines, and the grim outlook for jet fuel was a factor in the bankruptcy filings this month from Northwest Airlines Inc. and Delta Air Lines Inc.

While both those airlines tried hard to stay solvent, fuel prices and the hurricane-related price increases made "time run out on the process," said analyst Ray Neidl of Calyon Securities Inc. in a note to investors. United Airlines Inc., expected to exit from bankruptcy next year, "probably needs to further modify its business plan with oil above $65 a barrel," he wrote.

American Airlines Inc. is doing all it can to buy fuel at the lowest prices in different parts of the country outside of the gulf region, but it is essentially forced to pay the brunt of the higher refinery costs. The carrier expects to pay $1.5 billion more this year than last for jet fuel.

Southwest Airlines Co., the dominant carrier at Baltimore-Washington International Airport, finds itself in a substantially better position.

Not only does Southwest have 85 percent of its jet fuel needs prepurchased at oil prices equivalent to $26 a barrel for this year, but the low-fare carrier also has "hedged" its risk on refining costs for this year as well, said spokesman Ed Stewart.

The lingering concern for Southwest remains that its protections will gradually fade.

The industry's outlook for both crude oil prices and for refining costs isn't pretty. The short-term damage from the gulf storms isn't completely clear, Freyman said, but more capacity should return in a few weeks.

Fixing the long-term refinery shortage could take up to five years, according to Vaughn Cordle of AirlineForecasts.

Shares of American parent AMR Corp. fell 17 cents to $10.75. Southwest fell 4 cents to $14.52.

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