honoluluadvertiser.com

Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser
Posted on: Saturday, October 27, 2007

Record prices for jet fuel 'very upsetting'

By Trebor Banstetter
Fort Worth Star-Telegram

FORT WORTH, Texas — For more than three years, the nation's airlines have grappled with persistently high fuel costs. But they haven't seen prices quite like this before.

Jet fuel prices reached $2.54 a gallon yesterday, the highest price on record. The price spike was driven by the surge in crude oil prices, which topped $90 per barrel this week for the first time ever. Some energy analysts predict that prices could rise even higher, perhaps topping $100 per barrel.

If they persist, executives and analysts say the high prices could seriously threaten the airline industry's fragile turnaround. The airlines have greatly improved their fuel efficiency in recent years and used fare increases and hedging contracts to blunt the impact. But the high costs are impossible to entirely mitigate for an industry that burned nearly 20 billion gallons of fuel last year.

"These prices are very upsetting and worrisome," said George Hamlin, a longtime industry analyst with ACA Associates. "The industry is very concerned right now."

Executives at Fort Worth-based American Airlines point out that every penny increase in the price of jet fuel costs the carrier about $30 million annually. During the third quarter, the airline spent more than $1.7 billion on fuel.

It was one of the few times in the airline's history that the fuel bill was higher than the cost of labor, which is traditionally its largest expense.

American is forecasting that fuel prices during the fourth quarter will be about 20 percent more than a year ago.

The good news, Hamlin said, is that the problem isn't new. Fuel prices have been steadily rising for several years, and the industry weathered spikes in cost after the beginning of the Iraq war and Hurricane Katrina.

Carriers have adapted by entering into fuel hedging contracts, making their airplanes more fuel-efficient, cutting back on flights and raising fares.

"The industry made money (during the third quarter) at $80 per barrel," Hamlin said. "So they've learned a lot over the last few years."

American has 40 percent of its fuel purchases for the fourth quarter capped at $69 per barrel of crude oil prices. Southwest Airlines, based in Dallas, has 90 percent of its fuel locked in at $51 per barrel for the quarter.

Higher fares also have been a major part of the strategy to overcome fuel costs this year. Yesterday, Continental Airlines raised prices by $10 each way, and Delta Air Lines and United Airlines followed suit.

But fuel efficiency and higher fares can only go so far if prices continue to rise, Hamlin said. Eventually, higher prices will discourage leisure travelers from flying. And high energy prices could hurt the overall economy, which would likely mean a decrease in business travel.