Continuing the battle against high fuel costs, airlines aggressively have mitigated increases through fuel-hedging activities, efficient fleet deployment and—to the dismay of travel buyers—further fuel surcharges and fare hikes, as evidenced by new efforts this month.
Delta Air Lines led two moves raising prices. One, late last week, matched by American, Continental, Northwest, United and US Airways, raised walk-up coach fares and unrestricted, one-way first class tickets on domestic flights by $50, according to published reports.
American, Northwest, United and US Airways in recent weeks also matched Delta's fuel surcharge increase of $10 on most transatlantic flights from the Western Hemisphere, except those originating in Canada and Mexico. Delta also said the surcharge for transatlantic flights originating in Italy will increase E10. "United also raised domestic fares by $5 to $10 each way," Calyon Securities airline analyst Ray Neidl said in a research note last week.
The Benchmark Co. managing director Helane Becker said Continental also recently raised its fuel surcharge. "No one matched the Continental one, but they kept it in place," she said. "They also called theirs a fuel surcharge. This is like a new event. This is what they're thinking of doing as a way to raise fares without actually coming out and saying they're raising fares."
Delta in April joined other carriers—including American, Northwest, British Airways and KLM Royal Dutch Airlines—in upping fuel surcharges
(BTN, May 1). At the time, Delta levied a $10-per-way charge on tickets for most transatlantic flights, except those to and from France and Italy.
Calyon Securities' Neidl last week said he expects carriers to continue their upward pricing—be that through surcharges or fare increases—to offset rising fuel costs. "If oil prices hold steady, airlines should be able to make money driven by ticket-price increases that have occurred thus far and which we expect will continue to take place, laying the groundwork for some gains in prices over the next 12 months. However, if fuel prices were to soar, it would terminate any potential significant airline stock price rally and cause prices to weaken as we go into the summer season," Neidl said, noting the industry "is capable of making profits in the upcoming quarters even with fuel at around $70 a barrel."
Carriers are attempting to lock in such prices through fuel-hedging initiatives. Northwest this month initiated a fuel hedge for the second half of the year, capping prices at $79 per barrel for 25 percent of its oil. However, as part of the arrangement, Northwest would pay no less than $65 for hedged oil, demonstrating the fuel-hedging risk should prices abate. US Airways this month, meanwhile, said it modestly upped its fuel-hedging percentage by one point, noting that about 39 percent of its fuel consumption this year will be hedged. Such carriers as American, Continental and Delta also have percentages of their fuel hedged for the year. United, however, in its most recent quarterly report noted that it does not have fuel hedges in place for 2006.
"Hedges in the $60-to-$70 range are a far cry from some we've seen from the low-cost carriers in the $20s and $30s," said American Express Global Advisory Services airline consultant Prashanth Kuchibhotla.
Southwest Airlines, which has benefited from fuel hedging more than any other domestic player, this year is hedging 70 percent of its crude oil requirements at $36 a barrel. Southwest hedged roughly 60 percent at $39 per barrel for 2007, over 35 percent at roughly $38 per barrel for 2008 and about 30 percent hedged for 2009 at approximately $39 per barrel, Southwest said in its most recent quarterly earnings report.
Meanwhile, Malaysian Airline System chief executive Idris Jala, during an International Air Transport Association's conference this month, suggested airlines employ consortium-buying models to collectively lock in fuel prices, according to published reports.
"That's been talked about for a while. Fuel is one commodity where you could actually do it," said Kuchibhotla. "People have talked about collective fleet purchases or IT purchases, but airlines are very parochial about their way of doing things. It's hard to do joint purchases, but for a commodity like oil, why not?"