The one-two punch from Hurricane Katrina and consequent fuel cost surges in the past two weeks spurred the federal government to revise reimbursable mileage guidelines for U.S.-based corporations and hotel analysts to forecast stifled domestic demand growth. Meanwhile, heightened costs further infected the already-ailing airline industry.
Amid high post-Katrina gas prices, the Internal Revenue Service last week implemented a rare midyear adjustment to its allowable vehicle reimbursement rate for the remainder of 2005 to 48.5 cents per mile—the largest single increase ever, at 8 cents over the initial 2005 rate. Meanwhile, British Airways, Lufthansa, Virgin Atlantic Airways and others this month announced increases to their passenger fuel surcharges, owing to debilitating jet fuel costs in the wake of Katrina.
Although IRS typically adjusts its annual mileage rate in the fall for the following year, the government agency is breaking precedent not only with the midyear adjustment but also by waiting to determine the 2006 rate.
"With many predicting a decline in gas prices over coming months, we will hold off on setting the 2006 rate until closer to January," IRS commissioner Mark Everson said in a statement.
"Even before the storm, gasoline and diesel prices were high as a result of tight crude oil supplies and increased global demand for transportation fuels," the U.S. Department of Energy said this month. Yet, evacuated oil facilities in the Gulf of Mexico and gasoline pipeline power outages exacerbated problems. "The end result is even higher prices than before," the Energy Department said.
According to data published by AAA, at press time one gallon of regular unleaded gasoline in the United States cost an average $2.92, compared with $2.48 one month ago and $1.84 one year ago.
Citing Energy Department statistics, PricewaterhouseCoopers in an analyst report released this month said that gasoline prices increased by nearly 14 percent between Aug. 1 and Aug. 29. "With the disruption of oil supplies following the Gulf area hurricane, oil prices are expected to continue rising, even though the administration's release of strategic oil reserves will help alleviate price increases in the short run," the PwC report said. "Oil prices remain a fundamental demand and supply issue with significant implications for the strength of the U.S. economy."
Katrina, coupled with fuel costs, exacerbated an already-difficult environment for the airlines. The International Air Transport Association last week revised its projected 2005 loss for the global airline industry to $7.4 billion from $6 billion. Specifically, IATA said North American carriers on aggregate would lose $8 billion, while European airlines break even and Asia/Pacific carriers accumulate a $1 billion profit. Also citing fuel prices, Northwest Airlines on Oct. 2 will discontinue nonstop flights between New York JFK and Tokyo. Connecting flights will be available through Detroit and Minneapolis. Northwest said New York-Tokyo flights last month accounted for 2 percent of systemwide capacity and 8 percent of Pacific region capacity.
The U.S. Senate's aviation subcommittee last week held a hearing to review the impact of Hurricane Katrina on the airline industry. Air Transport Association of America president and CEO James May testified that Katrina's legacy includes "dramatic increases in the price of jet fuel," adding that before Katrina the price stood at $1.87 per gallon, then peaked at $2.36 per gallon following the storm. As such, several international airlines recently raised passenger fuel surcharges.
Lufthansa cited the hurricane's impact on fuel costs last week when it raised its fuel surcharge by £3 on European routes and by £15 on intercontinental flights. British Airways said it will increase passenger fuel surcharges on tickets for long-haul flights. Levies on tickets sold in the U.K. will increase from £24 per sector to £30 per sector, while short-haul fuel surcharges remain unchanged at £8 per sector. The airline said it is looking to increase fuel surcharges on long-haul tickets sold outside the U.K. All Virgin Atlantic tickets now will include an upwardly revised $55 fuel surcharge for every sector. "This surcharge will only recoup about one-third of the cost of fuel for Virgin Atlantic," the airline said in a statement.
"Unfortunately, the future is not bright," May said. "Our latest forecast shows that we will pay $9.2 billion more for fuel in 2005 than 2004. In 2005, for roughly 452 million barrels of jet fuel, the industry spend will be $30.6 billion. No wonder we now project a $10 billion loss for 2005 on top of the $32 billion loss after 9/11 through 2004." To help mitigate fuel costs to the airline industry, May suggested the government grant a yearlong "holiday from the 4.3 cents-per-gallon jet fuel tax."
Meanwhile, U.S. Department of Transportation secretary Norman Mineta one week after the hurricane suggested a repeal of the 7.5 percent domestic airline ticket tax. "While his team subsequently backed off, given DOT's lack of jurisdiction, some sort of security fee relief is possible and not unprecedented," J.P. Morgan Securities analyst Jamie Baker said. "Recall that the $10 round-trip security fee was waived in June-September 2003
(BTN, Oct. 6, 2003). With jet kero still close to $2 per gallon, the need for relief is stronger than ever. Maybe all the references made by the airlines and their lobbyists to the industry's too-onerous tax burden have not fallen on deaf ears."
The Benchmark Co. airline analyst Helane Becker marginally reduced third-quarter estimates for Southwest Airlines, which accounts for 35 percent of the commercial passenger market share at Louis Armstrong International Airport in New Orleans. Delta's daily New Orleans revenue of $441,000 prior to Hurricane Katrina ranked second to Southwest's $710,000, according to Becker.
Meanwhile, Louis Armstrong New Orleans International Airport last week accepted its first post-Katrina passenger flight into the city. Northwest, followed by Delta, operated the first flights from their hubs in Memphis and Atlanta, respectively.
The impact of Katrina and fuel costs also should affect major hotel chain earnings, albeit modestly. "The quarter will be affected by it," said Bjorn Hanson, head of the hospitality and leisure practice at PwC. "The chains mostly are brand and management properties, so they may lose some revenue, but it's the real estate owners who have the most at risk and have lost the most."
PwC said the effects of Katrina and gas price increases "will reduce fourth-quarter U.S. lodging demand growth to 2.7 percent from 3.4 percent. Occupancy in the fourth quarter is expected at 57.5 percent under this scenario compared to 58.1 percent without Katrina and gasoline price increases since Aug. 1."
While initial estimates said many hotels in devastated areas would not open their doors for general business until next spring, the New Orleans Metropolitan Convention and Visitors Bureau last week said many hotels will be operational in the next 30 days to house relief workers.
"Many properties are undamaged or only lightly damaged and are running on self-generated power at this time and fully servicing recovery staff," according to the CVB.
Yet, general availability of those hotels will take longer than initial projections. "For those hotels that have been damaged it will be more than a year," said Hanson. "All of 2006 will be affected."