Rising cost of jet fuel sends fares upward
By Mary Schlangenstein
Bloomberg News Service
American Airlines, United Airlines and Northwest Airlines raised fares in some markets after Continental Airlines increased its prices by as much as $40 for a roundtrip because of higher costs for jet fuel.
American matched the increase in Europe and said it probably would adopt it worldwide.
United and Northwest didn't specify where they raised fares by $20 for a roundtrip on flights under 1,000 miles and $40 on longer routes.
Southwest Airlines, the largest low-fare carrier, said it may impose a smaller increase.
Jet-fuel prices have risen about 34 percent since April 1 to more than $1.23 a gallon. Fuel is the second-largest expense for airlines, after labor, and accounts for as much as 20 percent of operating expenses. Airlines worldwide have increased fares and raised cargo rates because of the higher prices.
"We are going to have to find a way to pass on these fuel prices," UAL Corp. Chief Executive Glenn Tilton told reporters after a speech to an industry group in New York.
US Airways didn't match Continental's increase, and Delta Air Lines and America West Airlines didn't return calls seeking comment.
Most U.S. airlines had planned for crude oil prices of $25 to $30 a barrel this year. Jet fuel is refined from crude, which rose 96 cents, or 2.4 percent, to $41.50 a barrel on the New York Mercantile Exchange yesterday after touching a high on Monday.
Higher fuel prices will push U.S. airlines to a $3 billion net loss this year, said David Swierenga of AeroEcon, an airline consulting firm based in Vienna, Va. He said prices that are about 30 cents a gallon higher than he forecast will add $5.4 billion to industry costs this year.
"Fuel prices at this level are weighing heavily on the industry," Southwest Chief Executive James Parker said after the company's annual shareholder meeting in Dallas.
Parker said he "couldn't rule out the possibility that higher fuel costs could force us to raise fares $1 or $2" each way on some fares.
Continental said the fare increases will cover 20 percent of its higher fuel costs, and it may be forced to lay off workers and cut wages, benefits and pension contributions. The airline said it would report a second-quarter loss and a "significant loss" for the year.
American, Continental and other U.S. airlines have failed in three attempts this year to raise ticket prices because some competitors declined to match. Airlines typically drop fare increases that are not adopted by rivals to remain competitive.
The Air Transportation Association, which lobbies for the carriers in Washington, renewed calls for the Bush administration to halt diversions to the Strategic Petroleum Reserve any time prices rise above $30 per barrel.
Instead the oil would be released into the U.S. market, lowering prices, the group said in a statement.
American, the world's largest airline, said its cost to buy jet fuel will jump as much as $700 million, or 25 percent, this year. The carrier's spending for fuel last year rose 8.2 percent to $2.77 billion. American, which secured $1.8 billion in job and compensation cuts from workers last year, is not considering further concessions, said CEO Gerard Arpey.
"Obviously with fuel where it is, you'd like to see that offset in your prices, so undoubtedly we will match," Arpey said after the airline's annual shareholder meeting in Fort Worth, Texas.
Dallas-based Southwest has hedged 80 percent of its fuel needs for this year and next at $24 to $25 a barrel of oil.
Still, its fuel costs may rise as much as $100 million this year on the remaining 20 percent, the airline said.
The hedges, or financial instruments that protect against sharp price increases, will help ensure that Southwest is profitable this year and probably will mean the airline can meet its second-half forecast of keeping costs per seat for each mile flown little changed, said Chief Financial Officer Gary Kelly.
"We have to be prepared for higher energy prices into the future," Kelly said.
"Indeed that may put even more pressure on the rest of our cost structure."
Airlines have been trying to reduce fuel use in a variety of ways, from cutting the weight onboard planes to using one engine while a plane is taxiing. Southwest is adding winglets, or curves, on the end of its airplane wings to reduce fuel burn 3 percent to 4 percent.
