Airlines Fighting High Fuel Prices With Fare Hikes - Business Travel News

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Airlines Fighting High Fuel Prices With Fare Hikes

May 05, 2011 - 03:00 PM ET

By Jay Boehmer

On the first business day of the year, West Texas Intermediate crude oil opened at $91.30 on the New York Mercantile Exchange. On the last day of the first quarter, it closed at $106.72 and since has continued its climb. Many U.S. airlines ended 2010 with profits, pricing power and optimism, but higher jet fuel costs single-handedly ruined first-quarter financial performance. Profits for 2011, however, still are within reach thanks to sustained fare-increase momentum, demand strength and downward capacity revisions.

With a $213 million first-quarter net loss, United Continental Holdings could not overcome a $725 million year-over-year increase in fuel expenses. A $610 million increase in fuel costs dragged Delta Air Lines to a $318 million first-quarter net loss, worse than the $256 million loss recorded a year earlier. US Airways posted a first-quarter net loss of $114 million, more than doubling its loss from the year-earlier period, as quarterly jet fuel costs jumped by $240 million.

For American Airlines parent AMR Corp., which lost $436 million in the first three months this year, the $351 million year-over-year increase in fuel costs was not the only thing standing in the way of profits, as non-fuel-related events, including winter weather, distribution battles and the earthquake in Japan, hit first-quarter revenue by more than $100 million, officials said.

Southwest Airlines and JetBlue Airways fared better. Southwest overcame its growing fuel bill with a $5 million profit, down from $11 million a year earlier. JetBlue, despite a 39 percent year-over-year increase in jet fuel expenses, reversed last year's $1 million net loss to a $3 million net profit.

"Fuel is the biggest challenge facing this industry, and Delta is actively reducing capacity, implementing fare actions, hedging our fuel needs and attacking our cost structure in order to offset fuel's impact on our earnings," according to a statement by CEO Richard Anderson.

In 2008, record-high fuel costs brought airlines to their knees; comparisons with the current environment have been common. "2008 and 2011 fuel at midyear look about the same," according to a research note issued last week by J.P. Morgan aviation analyst Jamie Baker. But now, "capacity cuts, fare unbundling, consolidation, better management and a fare-hungry Southwest can work wonders. To wit, we anticipate a $7.6 billion industry operating profit in 2011."

Baker expects U.S. carriers to spend $10 billion more on jet fuel than they did in 2010. According to the Air Transport Association, a $1 increase in the price of a gallon of jet fuel translates to an additional $17.5 billion in the industry's annual operating expenses. At press time, West Texas Intermediate crude oil hovered around $110 a barrel on the New York Mercantile Exchange.

Fare Hikes Drive Revenue Gains

Domestic airlines so far this year have attempted 12 broad fare hikes, seven of which have been successful, according to Most of those added between $4 and $10 to the cost of a roundtrip ticket.

US Airways' total revenue per available seat mile in the first quarter increased 9 percent on "strong demand" and "a series of fare increases," with yield growth at 8 percent. Delta's quarterly unit passenger revenue jumped 7 percent year over year, with a 12 percent improvement in passenger yield and 1 percent increase in total traffic. United Continental Holdings' consolidated yield and RASM increased 13 percent and 10 percent, respectively, on a pro forma year-over-year basis. AA's consolidated passenger RASM grew 5 percent during the quarter, while yield grew by 6 percent.

Southwest, meanwhile, reported that the average one-way fare increased more than 11 percent to $139 and JetBlue for the quarter claimed the highest average fare in its history, at $150, up nearly 6 percent from a year earlier.

Nevertheless, "the revenue growth experienced in the first quarter has not been sufficient to keep pace with higher jet fuel costs, which have risen more than 30 percent from a year ago," according to ATA chief economist John Heimlich. "The airline industry remains concerned about a possible slowdown in demand induced by rising energy prices across the economy."

Corporate Business Healthy

Major U.S. carriers agreed on the improving health of the corporate travel market, even if volumes have not fully recovered to pre-recession levels. "We continue to see rebounds in demand throughout our corporate base, but notably in the automotive and financial sectors," said Delta president Ed Bastian, who claimed quarterly corporate revenue grew 27 percent year over year.

Claiming a 17 percent year-over-year increase in corporate yields, United chief revenue officer Jim Compton said corporate revenue improvement "has been slow but steady. Recovery has been largely driven by yield improvements, with volumes increases not yet materializing."

AA vice president of corporate development and treasurer Beverly Goulet reported that corporate revenue increased during the first quarter and said "we continue to have a corporate revenue share premium versus the industry."

Carriers Continue Capacity Revisions

To cut unprofitable flying and maintain pricing power, several airlines during earnings calls last month revealed plans to further scale back growth plans. Citing increasing fuel prices, US Airways CFO Derek Kerr said, "Total system capacity in the back half of the year now will be down versus 2010—in the third quarter by approximately 0.5 percent and in the fourth quarter by around 2 percent." American also noted plans to cut an additional 1 percent of fourth-quarter capacity.

Though its growth rates remain among the highest in the domestic industry, JetBlue revised downward its full-year growth plan by 1 percentage point and now expects available seat miles to increase between 6 percent and 8 percent.

Delta after Labor Day will cut transatlantic capacity by 8 percent to 10 percent year over year to reverse what Anderson described as "significant industry overcapacity in the transatlantic marketplace." He said that "of the $200 million erosion in year-on-year pre-tax earnings, $150 million of that amount is attributable to transatlantic performance. We will fix that in cooperation with our transatlantic partners Air France, KLM and Alitalia."

David Jonas contributed to this report.


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