Airfares Climb as Fuel Cost Rockets
The prospect of military action in Iraq is contributing to the biggest surge in jet fuel prices since the Persian Gulf War, deepening the airlines’ financial crisis, driving up airfares and increasing pressure for layoffs and other cost-cutting measures.
Continental Airlines Inc. announced Friday that it was imposing an immediate increase of $20 for round-trip fares on all domestic and international flights to offset rising fuel costs. AMR Corp.’s American Airlines and US Airways Group Inc. quickly followed suit.
Although petroleum prices have been going up across the board, kerosene-based aviation fuel has rocketed higher than most. The price of “jet” has doubled in the last year and has been rising faster than those of crude oil and gasoline in recent weeks.
Airline industry analysts and insiders say higher prices could be enough to push more airlines into bankruptcy proceedings. US Airways and UAL Corp.’s United Airlines already are operating under court protection.
Fuel accounts for about 12% of airlines’ operating expenses, second only to labor in the industry’s cost structure.
“We’ve got $100 billion in debt, no reserves, no borrowing capacity,” said President James C. May of the Air Transport Assn. of America. “This is not a matter of cry wolf. It’s a matter of very serious national concern.”
The industry wants the federal government to ease the pressure by releasing oil from the Strategic Petroleum Reserve. The Bush administration has declined to do so, saying the stockpile will remain off-limits until there is an actual supply shortfall.
On Friday, the New York Harbor spot price of jet fuel was about $1.10 a gallon, according to Oil Price Information Service, a Lakewood, N.J.-based firm that tracks gasoline prices. That compares with a low of 49 cents two months after the Sept. 11 attacks, which caused a dramatic decline in airline traffic.
The recent increases are sending shudders through an already shaken industry, which has shed more than 80,000 jobs since the terrorist attacks.
“It’s devastating,” said Cristina Haus, editor of Jet Fuel Intelligence, which tracks the market’s gyrations. “The airlines are hemorrhaging cash as we speak. And it’s not over yet. The prices are going to go higher.”
Air Transport Assn. chief economist David Swierenga said U.S. carriers posted combined losses of $8 billion in 2001 and $10 billion last year.
Before the recent rise in fuel prices, the industry was expecting to pare its losses to about $5 billion in 2003. Now it looks as if this year’s deficit could be nearly twice that amount.
“We’ve seen better than a 25-cent run-up in the last two months,” Swierenga said. “Twenty-five cents per gallon is $4.5 billion in additional costs [per year] for us. That certainly is enough to put more airlines into bankruptcy.”
Continental’s fuel costs already exceed $1 billion a year. In raising round-trip fares Friday, the Houston-based carrier said: “Although the airline industry is suffering from overcapacity and weak demand, this fare increase is necessary to get Continental back on the path to financial recovery.”
Within hours, American Airlines said it was matching Continental’s fare increase “for competitive reasons.” The company said it expected to pay 91 cents a gallon for jet fuel this quarter, up 36% from a year ago. Every additional penny adds about $30 million to its annual expenses.
On Feb. 7, the same day the spot price of jet fuel hit a 12-year high of $1.22 a gallon before easing off, a union leader sent an e-mail to American Airlines pilots warning that the company’s dwindling cash reserves could force drastic action.
Although a bankruptcy filing is not the only possible outcome, he said, pilots should prepare for furloughs, pay cuts and less accommodating work rules.
“AA needs the help now to avoid bankruptcy, not in two years,” the union official said. “Please treat this as an emergency on the flight deck.”
American spokesman Bruce Hicks acknowledged that the company’s financial condition is dire, and big changes will be required to avert a bankruptcy filing. The company already has requested $1.8 billion in labor-cost reductions from its pilots and other employees.
“To avoid the fate of US Air and United, we have to make permanent changes,” Hicks said. “We know that. The losses are not sustainable over the long term.”
Aviation consultant John Armbrust said declining passenger counts and higher fuel costs would hasten an inevitable industry consolidation.
“We’re probably going to take a process of about five years and shrink it down to a two-year period of time,” he said.
The airlines’ problems are perhaps the most extreme manifestation of the economic pain inflicted by energy prices, which had risen gradually for more than a year before accelerating rapidly in recent weeks. Since mid-November, the price of crude oil has jumped $10 a barrel, topping $35 this week.
Some refined products have had even larger percentage increases.
The biggest gains have been posted by the middle distillates: heating oil, diesel and jet fuel. The three products can substitute for one another to some extent, and their prices tend to move in tandem.
The recent run-up reflects what some analysts call a “perfect storm” of price pressures: the loss of exports from strife-torn Venezuela, unusually cold weather in the United States and preparations for war in Iraq.
The first two have contributed to actual reductions in available crude oil and petroleum products.
The third factor is based mainly on anxiety about possible wartime supply disruptions.
