Airline Labor, Fuel Costs Loom

As passenger revenues continue to be hard hit by lower average ticket prices, major carriers face potentially crippling developments on the cost side of the equation as labor pains continue, the specter of rising fuel prices looms large and security and insurance costs mount.

Affected by developments in the Middle East and Venezuela, crude oil prices fluctuated last week and could spike in the days and weeks ahead. They had been on the rise since the beginning of the year, prompting many carriers to reapply fuel surcharges, particularly for cargo operations.

American Airlines, for example, on April 17 again added $0.05 per kilogram on shipments from the United States to international destinations and $0.02 per pound for domestic shipments. The carrier initially had levied the cargo surcharge in February 2000, but dropped it last December.

"Oil prices have steadily increased in recent weeks, exceeding the levels in 2000 when we previously applied our surcharge," said Richard Denhart, spokesperson for American Airlines Cargo. "As fuel represents a large variable operating cost for an airline, we need to reintroduce this surcharge to address this increased cost pressure."

Similarly, AA's Oneworld partner LanChile, effective April 18, added a cargo fuel surcharge of US$0.05 per kilogram, with a minimum of US$5 per shipment. The carrier said it will roll back the surcharge when warranted by market trends.

KLM Royal Dutch Airlines also reintroduced the US$0.05 per kilogram surcharge on cargo shipments.

With more impact on corporate travelers, Air Canada on April 11, raised the current domestic fuel surcharge of C$7.50 (US$4.76) on all one-way tickets back to C$15 (US$9.53), the original level the carrier established last May. Unlike many U.S. carriers, Air Canada in November halved the fuel surcharge for passenger tickets in response to falling jet fuel costs.

Airline passengers in the United States also may have to brace for a second round of fuel surcharges, even as the earlier ones—levied more than two years ago (BTN, Jan. 24, 2000)—remain in place in most markets.

"The average price of crude oil increased 23 percent in the first quarter, a dramatic increase and way more than anyone would have expected," said Gordon Bethune, Continental Airlines chairman and CEO.

The carrier's executives, however, would not comment on any possible increases to passenger surcharges because those potential added costs to the traveling public "are part of the fare structure."

Though U.S. carriers originally added fuel surcharges nearly in lock-step, and would be expected to do so moving forward, various levels of hedging leave some carriers more protected than others from oil uncertainties.

Delta Air Lines, which has hedged 57 percent of its expected jet fuel requirements for the second quarter at a favorable average price of $0.58 per gallon, and Southwest Airlines are among the better hedged carriers, while America West, United Airlines, US Airways and Northwest Airlines are among the least.

On the labor front, at United, a carrier plagued by labor strife for years, management and the union representing 23,000 ramp and customer services workers remain at odds over a new contract. The International Association of Machinists had asked the National Mediation Board to declare an impasse and start the clock ticking on a 30-day cool-off period, but that request at press time had not been granted and both sides are set to resume negotiations later this week.

A work stoppage would be devastating for United, which hopes to finalize the open contract with the airport workers and begin negotiating labor concessions in a far-reaching, cost-cutting initiative.

Meanwhile, at US Airways, management and the Air Line Pilots Association late last week agreed to increase the number of regional jets to be deployed throughout the carrier's network. After negotiating for months, the two sides agreed to double the number of RJs to 140. Management said it needs to significantly increase regional jet flying to compete with low-cost competitors on the East Coast.

Continental Airlines, which has been in the clear for a few years relative to its competitors, later this year will begin contract negotiations with both its pilots and mechanics unions.