The price of crude oil this morning flirted with a new record and the $50 threshold as the U.S. Department of Energy's announcement last week that it would negotiate the release of oil supplies from the Strategic Petroleum Reserve did little to lower prices. Meanwhile, an American Airlines-led fare hike implemented last week to offset escalating fuel costs appeared to be sticking around the industry.
"The fare increase of Wednesday night seems to have held," said Helane Becker of The Benchmark Co. in a research note this morning, referring to the $10 roundtrip price hike initiated by American
(BTNonline, Sept. 22). "This is tenuous at best, but if it holds, we would be surprised and encouraged because it would be the first increase that held in two years."
American had said the fare increase was tied to fuel, which this year is expected to cost major carriers hundreds of millions of dollars more than in 2003. Rather than retreating from sky-high levels last week, the price of a barrel of crude oil was up nearly 60 cents at press time and hovered near $50 on the New York Mercantile Exchange.
Such fuel prices likely would further jeopardize US Airways' survival and complicate financial recoveries at other carriers. "Our best expectation is that oil will fall," said J.P. Morgan Securities analyst Jamie Baker. "If we're mistaken and oil rises further, the probability of a US Airways failure similarly rises." Baker currently estimates the probability of US Airways' survival is around 60 percent.
He also said fuel costs partly prompted a larger industry loss estimate for 2004, up from $3.7 billion to $4.5 billion. "For 2005, however, we continue to model for a breakeven year," Baker added, "though admittedly the outcome is largely up to the Organization of Petroleum Exporting Countries and US Airways' bankers." He currently uses average oil prices of $38 per barrel in his 2005 estimates.
The price has shown no signs of decline after the U.S. Department of Energy last week said it "intends to enter into negotiations to make available a limited quantity of crude oil from the Strategic Petroleum Reserve." The airline industry repeatedly has called on the federal government to either release reserves or curtail supply shipments into the reserve as a means to lower fuel prices. The administration has shown no desire to release reserves on behalf of the airline industry
(BTNonline, May 20) and DOE said its decision stemmed specifically from recent hurricanes that have disrupted oil supplies from the Gulf of Mexico.
"I have authorized these negotiations in response to the physical disruption of offshore oil production and imports in the Gulf region caused by Hurricane Ivan's destruction," said Energy Secretary Spencer Abraham. "As this administration has stated consistently, the Strategic Petroleum Reserve was designed to protect American consumers against supply disruptions, including natural disasters." DOE authorized similar negotiations following Hurricane Lili in October 2002.