Uneasy airlines anticipate $60-a-barrel oil

By Marilyn Adams, USA TODAY
Jittery airline executives, having already raised fares and cut flights, are now looking ahead to the possibility of $60-a-barrel oil.

Stuart Klaskin of KKC Aviation Consulting says his airline clients are running financial simulations to anticipate the effects. “You’ve got to assume the worst case,” he says.

Prices have been rising all year. Last week, crude oil prices increased to within 50 cents of October’s $55.67-a-barrel record. Oil closed Friday at $53.78
Recent decisions by large airlines to raise fares by up to $20 round trip won’t cover the added costs in fuel prices, says consultant David Swierenga of Vienna, Va.

He estimates that continuation of jet-fuel costs at current levels will add $600 million to airlines’ operating costs for the January-March quarter, 11% higher than what had been budgeted. Despite an expected increase in passengers, Swierenga now looks for the industry to lose as much as $2.5 billion this year, driving cumulative losses since 2000 to $33 billion.

The surge in oil prices is already having an impact.

A week ago, US Airways, which is operating in bankruptcy protection, quit flying three routes it had just launched from Fort Lauderdale — to San Juan, Puerto Rico, Panama City and San Salvador. US Airways cited fuel costs and weak bookings.

Discount carrier America West has stopped flying three transcontinental routes it launched in fall 2003. “With fuel prices at this level, it didn’t make sense to stay in those markets,” said spokeswoman Elise Eberwein, who also cited competition from other airlines.

Most big airlines are defenseless against increases in fuel prices because they lack the cash or financial credibility to hedge prices, or to lock in a future price by contract. Neither US Airways nor Delta Air Lines has fuel hedges this year. American has 15% of its fuel hedged this quarter. United, which also is in bankruptcy protection, is 30% hedged this quarter.

Among major airlines, only discount leader Southwest is well protected, with 85% of its fuel this year hedged at $26 a barrel.

The price volatility is worrisome for United, which has been in Chapter 11 for two years and hopes to exit this fall. But with fuel prices rising for reasons beyond the control of any airline, writing an accurate business plan is daunting. United’s business plan assumes oil prices in the $40-to-$49-a-barrel range.

Paul Stebbins, CEO of Miami-based fuel marketer World Fuel Services, says airline executives are “anxious and fearful.” Jet-fuel prices, he says, are much more likely to rise sharply than to fall sharply.

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