High fuel costs threaten airlines' feeble recovery

By Dan Reed
USA Today

Any chance that the nation's biggest airlines will scratch out a profit this year is quickly going down the tubes — and into their planes' fuel tanks.

Delta cut its earnings outlook last week partly because high fuel costs have eaten up revenue. Associated Press library photo • July 2003

Ben Brockwell, editor of Oil Price Information Service, calls it "the longest sustained run of high fuel prices in industry history."

And it's hitting the airlines just as they were beginning to stagger back financially. Together, the airlines have lost $25 billion in the past three years.

Yesterday, analyst Sam Buttrick at UBS Investment Research cut his earnings outlook for American Airlines parent AMR to a loss of $1.20 a share this year. He had been expecting a profit of $1.04. He blames high fuel prices and intense fare competition.

Last week, Delta cut its earnings outlook partly because of sustained high fuel costs. Yesterday, Buttrick changed his 2004 estimate for Delta to a loss of $5.60 a share, greater than his earlier projected loss of $3.35 a share. He warned that most other carriers are suffering from the same fuel cost and revenue problems, and he may lower his earnings estimates for them, too.

The airlines' revenue problems are well known. But the fuel cost issue has drawn little notice from consumers, analysts and investors until recently. Intense competition has shielded consumers from higher fares. Most industry executives, analysts and investors did not expect the fuel price problem to become as severe or to last as long as it has.

In January, American officials told analysts that they expected jet fuel prices to average 91 cents a gallon in the first quarter and 87 cents for the year.

But in the last 30 days, jet fuel prices have "rivaled anything seen during the Desert Storm war in the early '90s, or a year ago during the second Iraqi war," Brockwell says.

In February 2003, prices on the Los Angeles spot market, typically the highest-priced of five spot markets tracked by OPIS, peaked at $1.10 a gallon.

By late April last year, those prices had fallen to about 72 cents a gallon. They then rose steadily the rest of the year.

In the first quarter this year, the weekly average price on the Los Angeles spot market has fluctuated between $1.10 and $1.29 a gallon. Only on one day this year has the daily price on that market fallen below $1 — on Jan. 15, when the price was 98.5 cents a gallon.

"Barring a miracle, there is no way" prices will fall this spring, Brockwell says, as they did briefly last spring.

OPEC production cuts and past decisions by refiners to cut capacity and limit exposure to what had been an unprofitable and volatile market mean that demand is pushing ahead of supply now that airlines are increasing flying again.