AA Exec Assesses Impact Of Fuel "Tidal Wave"

American Airlines is losing $3 million per day under the current fuel prices and the industry should expect further capacity cuts and the introduction of new airline revenue streams as fuel is now the carrier's largest expense, said American Airlines senior vice president of government affairs William Ris at the opening session of the Association of Corporate Travel Executives Global Education Conference and Corporate Travel World at the Grand Hyatt Washington, D.C., last night.

"We are not in a perfect storm," Ris said. "That's where all the storms come from different directions at once. We are used to a lot of headwinds in our business. We are not in a perfect storm. We're in a tidal wave coming from one direction and that's the price of fuel."

According to Ris, from the start of deregulation until 2008, airlines annually lost $1.76 on every passenger, while this year they are losing $10.89. Historically, fuel was less than 10 percent of AA's costs. Now it's more than 40 percent.

Also feeding the record-high fuel prices are increases in crack spread—the cost differential between crude oil and the processed final product; in this case, jet fuel. Historically, the airline paid a $5 per-barrel crack spread and now is paying around $30 per barrel.

"For every $100 dollars of revenue that an airline takes, right off the top $20 or $25 go to taxes and fees," Ris said. "Now with the fuel prices, $40 goes just to fill up the tank. That leaves just 40 more dollars to buy airplanes, maintain the fleet, pay our people, fund pensions and healthcare, pay rent and a variety of other expenses. That is not a sustainable business model."

Ris said neither raising prices nor reducing operating costs provides a solution to offset the fuel costs, but a reduction in capacity might. Southwest Airlines' successful fuel hedging enables it to keep prices down domestically. Oil prices are based on the dollar and due to its weakness, international airlines are buying jet fuel at $55 less than domestic carriers, allowing them to keep fares stable.