Jet fuel costs, which continued to surge in the past month, served as the catalyst for several new rounds of domestic airfare hikes and new long-haul fuel surcharges. With carriers citing high fuel expenses as the major barrier to profitability, they increasingly are sharing the expense with corporate buyers.
AMR chairman and CEO Gerard Arpey during American Airlines' earnings call said, "This industry, just like every other industry that is dependent on oil, has to turn around and pass this cost to the customers or else there won't be an industry. We haven't done a good job in the past couple of years of taking this cost from the oil industry and passing it to the airline customers. We're doing a little better job this year, but ultimately airline passengers are going to have to pay this. Otherwise, there won't be airplanes flying around."
While fuel increasingly is given as justification for cost increases to travel buyers, Scott Gillespie, president of Solon, Ohio-based Travel Analytics said fare increases in the past year have gone up disproportionately higher than have fuel costs.
"The average fares have gone up about $12 in the past year, and $8 of that can be attributed to the fuel costs," he said, citing research that examines fare growth between late March 2005 to the same period this year. "Airlines also use it as a reason to justify decreased discounts," Gillespie said.
However, carriers assert—and say earnings statements confirm—that rising fares have yet to counter fuel costs.
AMR executive vice president of finance and planning and CFO Tom Horton last month said, "The airline industry is still losing money. Fares have not risen enough to offset the costs of fuel increases."
Capacity cuts are helping further fuel fare increases. "The capacity element helps us as an industry to price towards fuel—not price to fuel. We haven't been able to do that yet cause we keep chasing it and it keeps going up. We're clearly getting closer than we were before," Continental Airlines president Jeff Smisek told BTN. "Today, fuel is the single largest line item on our statement of operations—we used to call it an income statement, now we call it statement of operations. Fuel costs are more than employees worldwide, more than our fleet worldwide, more than our facilities worldwide. That's staggering."
American Airlines led the latest round of low-bucket fare increases of $10 on all roundtrip domestic routes. Continental , Delta, Northwest , United and US Airways all joined AA in the fare hike chorus.
Tom Parsons, CEO of discount travel site and airfare monitor Bestfares.com, said the fare increase on published low-bucket fares is the fifth of the year. "Add that to the 12 hikes that occurred in 2005, and this makes a grand total of 17 airfare hikes since January of 2005 on domestic routes not served by low-cost airlines like Southwest, Jet Blue, Spirit and AirTran," said Parsons. Yet, even low-cost carriers have been raising prices. Southwest and JetBlue this year led increases
(BTN, April 3) and Spirit last month raised most fares by $5 to $20 each way in domestic markets as well as the Bahamas, Mexico and the Caribbean.
In the past month, fuel also spurred high-end fare increases as well as newly initiated fuel surcharges on international long-haul routes.
Delta last month initiated a round of high-end fare jumps following a failed attempt led by United. The carrier raised first class and full coach fares in certain markets by $50, prompting other majors to at least partially follow. A Delta spokesperson would not disclose which markets the increase affects.
In an e-mail to clients heralding a new calculator that shows how fuel relates to fares, Gillespie's Travel Analytics noted, "Savvy travel buyers should not accept these hikes without a closer look. The buyer's challenge is to know how much of a fare hike is warranted, and how much should be negotiable. You have to look hard at the facts in order to create negotiating leverage for your travel program."
As such, the technology provider is offering a new tool that shows historic jet fuel prices and lets buyers see how they relate to other variables, such as distance of the trip and aircraft fuel efficiency.
Yet, corporate buyers cannot avoid some increases. American, Delta, Northwest, British Airways and KLM Royal Dutch Airlines recently upped fuel surcharges on various long-haul routes.
AA specifically did not raise surcharges on fares to and from Japan, but levied an additional $10-per-way fuel charge on other long-haul flights "with few exceptions." Delta levied a $10-per-way charge on tickets for most transatlantic flights, except those to and from France and Italy. Flights to or from India and Israel will have an added $15 and $19 each way, respectively. Northwest said that in most cases it is raising its fuel surcharge by $10 each way on flights to Europe, the Middle East and Asia. Surcharges on flights to India, however, remain the same.
KLM increased its fuel surcharge by ?5 (US$6.05) each way on all long-haul flights and said it would remove the charge "as soon as the barrel price drops below $65 for 30 consecutive days."
British Airways raised its fuel surcharge on long-haul flights by £5 to £35 (US$9 to $62), the carrier said. "Our annual fuel bill for 2005/2006 is expected to be £1.6 billion," said commercial director Martin George. "We estimated previously that this would rise by £400 million in 2006/2007 but, at these prices, we would now expect this year's fuel bill to be £600 million higher at £2.2 billion."
Virgin Atlantic matched BA and Ireland-based low-cost carrier Aer Lingus introduced its first-ever surcharges for flights to North America and the Middle East of ?70 ($86) per roundtrip. The airline cited an increased fuel bill of 86 percent since 2005. However, both Lufthansa and KLM merger partner Air France said they have no plans to raise their surcharges again.
Relief for buyers and suppliers from fuel costs and their consequences is not expected any time soon. Crude oil for May delivery last month rose to more than $72 a barrel, according to the New York Mercantile Exchange. Continental's Smisek noted that in addition to the base cost of oil, the crack spread—representing the cost of refinement for jet fuel—remains high.
"In October of last year, the crack spread was higher than the price of West Texas Intermediate crude," Smisek said. "There was a day when crude was $63 and the crack spread was $67 a barrel. So we were spending $130 per barrel for jet fuel. The crack spread today runs roughly $15, $16 and historically it's been below $5."
The Air Transport Association said the airline industry's total fuel bill more than doubled from 2003 to 2005 and increased $10.3 billion between 2004 and 2005. "In addition, the first-quarter price data suggests higher average prices throughout 2006 versus 2005," ATA said in a statement.