Airlines Sing the Blues as Jet Fuel Soars
Sat Jul 31, 2004
By Jon Herskovitz
Several major carriers have announced plans to slash billions of dollars in costs so they can keep their planes in the sky. The problem is that for every dollar they save, soaring jet fuel prices seem to add another dollar in expenses.
U.S. light crude prices (CLc1: Quote, Profile, Research) rose to more than $43 a barrel on Wednesday, topping peaks hit in June, and remained above $42 the following day. Jet fuel, the second biggest cost for airlines after labor, accounts for 12 percent to 14 percent of operating expenses.
Cost-reduction efforts are intensifying amid rising prices for fuel. But several major older airlines like American, United and Delta -- called legacy carriers -- have little room to maneuver because they have already made deep cuts to stave off -- or emerge from -- bankruptcy.
The higher fuel costs come during the peak summer travel season, making it difficult for the airlines to return to profitability at a time when they should be in the black.
Airlines have tried to increase ticket prices, but the higher fares have not stuck in a cutthroat marketplace where the difference of a few dollars will determine the carrier a customer selects.
"The legacy carriers' model is not designed to make money, no matter what they do with their other costs, when oil is at $42 a barrel." said analyst Ray Neidl of Blaylock & Partners.
These companies may be able to squeeze out marginal profitability with oil at about $35 a barrel, he said, but at higher prices "they are going to have losses and cash bleed."
Oil prices are stinging all airlines, Neidl said, even Southwest (LUV.N: Quote, Profile, Research) and JetBlue (JBLU.O: Quote, Profile, Research) . These low-cost carriers have offset their higher fuel costs with investments that lock in the price they will pay for a barrel of oil in the future, and those locked-in prices have turned out to be far below market price.
To place these investments, called hedges, an airline must be highly creditworthy and find a partner. Airlines that have struggled with bankruptcy have found it nearly impossible to place hedges because they do not meet these criteria.
FEWER SEATS, FEWER AIRLINES
If the price of oil stays above $40 a barrel, analysts say airlines will slash the number of seats up for sale. Those that are struggling could exit the industry.
To cut costs, airlines are offering fewer meals, blankets and pillows on planes, and they are keeping fewer employees on their payrolls.
The carriers have said they expect jet fuel to drive up their costs by several hundred million dollars each this year.
"Record-high fuel prices and an intensely competitive domestic revenue environment have made the need for further cost-cutting all the more clear," Gerard Arpey, chief executive of American parent AMR Corp. (AMR.N: Quote, Profile, Research) , said earlier this month.
Continental Airlines (CAL.N: Quote, Profile, Research) has said in recent months that fuel prices would add an extra $700 million in operating expenses this year, and it might have to lay off workers as a result.
"The current revenue and fuel environment have overwhelmed our efforts to return to profitability, and we now must achieve significant additional cost reductions," Continental CEO Gordon Bethune said when the airline released its quarterly earning in July.
Even Southwest Airlines said high fuel prices were one reason its quarterly profit missed Wall Street analysts' forecasts. The company has the best fuel hedging position of any major U.S. carrier and has saved of hundreds of millions of dollars because of its investment in fuel futures markets.
Airlines have tried to cut fuel costs by having their planes taxi on the ground with one engine, using the power from the terminal to supply air-conditioning when an airplane is at the gate, and installing blended winglets -- an angled extension to a wing -- that are designed to increase fuel efficiency.
"With fuel over $40 a barrel," AMR's Arpey said, "we continue to have our work cut out for us."
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