Haunted by ’08’s Losses, Airlines Pass on Fuel Costs

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AirlinesAirfares are rising at their fastest pace in years as airlines are having more success in passing on the higher cost of fuel to their passengers.

The average price of a ticket on a U.S. airline, including baggage and other fees, was 14 percent higher in March than a year ago. That’s the biggest 12-month increase and the highest average price for March in at least a decade.

The five biggest U.S. airlines together still lost a little more than $1 billion in the first quarter, but they appear determined to avoid a repeat of the multibillion-dollar losses in 2008, when they couldn’t recover rising fuel prices.

They appear to be making progress, with fuel prices in March just 1.5 percent higher than they were three years ago and fares up 10 percent.

“In 2008, airline CEOs were on the floor in the fetal position,” said Michael Boyd, an aviation expert and president of the Boyd Group. “This time they’re prepared.”

Unlike before, the fare increases are sticking this year. One big difference is that Southwest Airlines, which in 2008 typically balked at the increases, is raising its fares, too.

Southwest has bumped prices up seven times since the middle of December and, in a recent conference call with analysts, signaled that more increases are likely.

“I don’t like fare increases for our customers, but they’re certainly necessary in this soaring fuel-cost environment,” said Gary Kelly, the airline’s chairman and chief executive officer.

Southwest was the lone big U.S. carrier to squeeze out a profit in the first quarter, though losses overall for Delta Air Lines, American Airlines, US Airways and United Continental Holdings were less than expected.

And further airfare increases are expected because airlines still need to recover more of their fuel costs and the current increases haven’t scared away many passengers.

Soaring fuel costs are hitting every segment of the economy, from farmers and manufacturers to the typical two-car household, which is paying an extra $100 a month for gasoline.

For U.S. airlines, with fuel costs often their single highest expense, the increases become downright scary. Just a penny annual boost in the price of a gallon of jet fuel costs them $175 million, and if jet fuel averaged $3 a gallon for all of 2011, they would add $15 billion in fuel costs compared with 2010. That’s for an industry that last year had a $3 billion profit, according to the Air Transport Association, an industry trade group.

Jet fuel prices passed $3 a gallon in late February, up 50 cents since the first of the year, according to the Energy Information Administration. Fuel prices have since jumped to $3.30. In 2008, jet fuel peaked at $4.16 per gallon, according to the Energy Information Administration.

United Continental Holdings, the parent of United and Continental airlines, saw the price it paid for fuel increase 35 percent in the first three months of the year compared with a year ago. Southwest is projecting a $1.5 billion “fuel headwind” for the year, and American Airlines is expecting its fuel bill to rise $2.1 billion.

“High fuel prices remain one of the biggest challenges to our industry and our company,” Gerard Arpey, chairman and CEO of American, said in a statement.

American lost $436 million in the first quarter of 2011, but that was better than analysts had expected and less than the $505 million the airline lost in the same period last year. Arpey credited an increase in revenue per passenger because of an “improved fare environment … as well as a more robust business travel market.”

One promising sign for the airlines is that traffic has held up despite the fare increases. Southwest Airlines is seeing reported record loads and passengers, and American Airlines reported its March traffic up slightly, 0.7 percent.

Airlines are counting on passengers such as Rick Hayton of Jefferson City, Mo., who recently was waiting to board an American Airlines flight at Kansas City International Airport. As a consultant who monitors federal grants given to organizations, he flies on business about a dozen times a year, including to Washington, and that’s not being cut.

But he’s also taking his family on a trip to Europe this summer, and even though he doesn’t like fare increases and despises baggage fees and other fees, he plans to do more leisure travel.

“It’s not keeping us from traveling,” he said.

Terry Trippler, a travel consultant and owner of AirlineRulesToKnow.com, believes consumers are in a mood for vacations after going through tough economic times. And they don’t want to spend half their vacation time traveling in a car ? especially when high gas prices make that more expensive, too.

Passengers say they are seeing fare increases of $50 and more for a ticket compared with last year, and sharply higher costs for overseas travel. Fuel surcharges, which are more likely to be used on international flights than basic fare increases, are $450 for some round-trip tickets to Europe.

So is there a breaking point for consumers? Certainly for some, such as Arielle Surratt of Kansas City. She recently returned from a trip to visit relatives in Florida, but she won’t be traveling again for a while.

“I’ll fly again, but not before the end of the year because of the costs,” she said.

But Southwest and other airlines are working hard to gauge how much their fare increases are affecting demand, and hoping it will stay solid despite the higher prices.

Southwest arguably was the reason fares didn’t climb more in 2008, because the airline frequently wouldn’t go along with other carriers’ increases.

But now Southwest, which doesn’t collect baggage fees, has counted on several rate increases to help cover its fuel costs.

In 2008, Southwest was one of only two airlines that had fuel hedging programs to cushion the impact of higher fuel costs by using financial options and other measures.

This year, Southwest has plenty of company, and some other airlines’ hedging programs are already paying off. United Continental Holdings has hedged 46 percent of its fuel needs for the year. American has 41 percent of its fuel hedged, in a way that it benefits when oil goes over $84 a barrel.

By comparison, Southwest’s hedging program is covering just 30 percent of its fuel and kicks in only when West Texas Intermediate oil is over $110.

So Southwest is relying more on fare increases, which Kelly acknowledges the airline doesn’t like.

But he said the airline is using sophisticated analysis to ensure that they are “revenue positive” ? that fare increases won’t cut demand, or will cut it so little that any loss in passengers is more than offset by the remaining passengers paying more.

So far, Southwest has gained passengers on some higher-fare flights.

“So we’re not losing customers trying to chase a fare increase here,” Kelly said.

He acknowledged that fare increases are still a risk, especially concerning leisure travelers.

But with the airline facing an extra $1.5 billion in fuel costs, that’s an option it can’t ignore.

Source: McClatchy-Tribune Information Services.