Business

Airlines look at fuel surcharges as oil rises

Delta, American and other large air carriers may be poised to boost fares with fuel surcharges as crude oil moves closer to $100 a barrel.

"Every dollar that fuel rises erodes their earnings," said Jim Corridore, a Standard & Poor's equity analyst in New York. "It's not good news to see fuel prices back up. Once we start approaching $100 a barrel, you'll start to see fuel surcharges come back."

Crude settled at a 52-week high Tuesday of $89.82 on the New York Mercantile Exchange, underscoring the pressure on an industry whose two largest costs are jet fuel and labor. The price will top $100 by 2011's second half, Goldman Sachs forecast in a report this month.

Airlines grounded hundreds of planes, dropped routes and cut thousands of jobs in 2008 as oil surged to more than $145 a barrel and jet fuel soared to a record $4.36 a gallon. The run-up extended losses at most carriers that began in late 2007 and lasted until earlier this year.

Delta spent $5.67 billion on fuel through Sept. 30, or 26 percent of its total expenses, while American paid $4.74 billion, or 29 percent. United Continental couldn't get a fuel surcharge to stick this month.

"At $100-plus oil in 2011, they have to price to that on fares or surcharges or both," said Kevin Crissey, a UBS Securities analyst in New York. "The airlines are supposed to have several years of profitability to mend their balance sheets after this last downturn, and oil is eating into that."

Airlines adopt surcharges for expenses such as fuel by adding a specific amount onto their existing fare structures. Carriers have said that step can be simpler than adjusting the millions of prices in their computer systems.

Jet fuel for immediate delivery in New York Harbor closed Tuesday at $2.54 a gallon, the most since 2008. The price has jumped 28 percent from a year earlier. The previous 12 months saw a 42 percent surge, preceded by a 48 percent plunge in late 2008 as the recession ravaged demand.

Volatility in fuel prices is the industry's "No. 1 challenge," Southwest Airlines CEO Gary Kelly said.

"All you have to do is look back at the last decade to see what kind of havoc it wreaks on our industry," he said in a Dec. 15 speech. "It is the single biggest threat to aviation."

Every sustained $5 annual increase in the price of crude requires boosting round-trip fares about $7 to offset the cost on domestic operations, Jamie Baker, a JPMorgan Chase analyst, said in a Dec 15 report. Only two of 10 industrywide fare increases succeeded in 2010, according to travel website FareCompare.com.

United Continental, the world's largest carrier, was the first U.S. airline to try a fuel surcharge in 2010, raising one-way fares $10 on Dec. 6 after oil broached $89 a barrel. The Chicago-based company pulled back in most markets after Southwest, the biggest discounter, refused to match.

Seating-capacity cuts during the recession helped airlines phase out some of the cheapest tickets, so average fares inched up even as across-the-board increases fell through. The airfare consumer price index rose at least 10 percent each month from April through July, the Bureau of Labor Statistics said.

Oil's rise may test the durability of airlines' 2010 recovery, according to Dan McKenzie, a Chicago-based analyst with Hudson Securities.

"The industry has the wherewithal to offset a very modest amount of fuel-price volatility," McKenzie said. "Where earnings estimates are vulnerable and where stocks are vulnerable is when fuel prices march up from $95 to $100."

  Comments