Over A Barrel: Fuel Fears Frazzle Suppliers
The inflated price of oil already has derailed any hopes for a commercial aviation sector recovery in the first half of 2004 and now threatens to prevent most large airlines from regaining profitability before year-end. The timing of this trend toward higher jet fuel costs particularly is unfortunate for those carriers on the brink of bankruptcy or struggling to emerge from court protection. Meanwhile, the hotel industry also has experienced increased utility costs, but the situation has not reached a crisis. The per barrel cost of light crude topped a record $42 early last week, before moderating around $39 at press time.
To combat crippling oil prices, U.S. airlines for months repeatedly have tried to push through higher fares and increased passenger fuel surcharges. Through their lobbying group, the Air Transport Association, the airlines have sought changes to the U.S. government's policy toward the Strategic Petroleum Reserve, thus far with no results. Halfway through the year, most major carriers anticipate hundreds of millions of dollars in additional fuel expenses for 2004.
Numerous foreign-based carriers last month added or increased fuel surcharges applied to passenger tickets, but similar efforts by U.S. carriers have been much less successful, at least on the passenger side. Cargo operations at many airlines, meanwhile, use a pre-determined index to raise and lower fuel surcharges levied on shipments. Based on that index, such majors as American and Northwest airlines last week raised cargo fees.
Unwilling to relinquish any marketshare, major U.S. carriers are unable to implement such measures for passenger traffic given the intense price competition applied by low-cost carriers. Nevertheless, several this spring attempted numerous fare hikes to counterbalance jet fuel costs. They failed.
"With higher fuel costs, the airlines will just lose hundreds of millions of dollars until they either raise fares and the increases hold—which hasn't occurred in the past two years, so it probably won't occur any time soon—or fuel prices go lower, a more likely incident, but not before the end of the summer," said Helane Becker, analyst for The Benchmark Co., in a research note late last month. She later labeled the repeated attempts to raise fares as "tiresome."
Some travel managers agreed with that sentiment. "I just wish the airlines would raise fares and leave them alone rather than sticking their toe in the water and pulling back anytime somebody else doesn't match," said Marilyn Townsend, travel manager at Dallas-based media firm Belo. "Every consumer understands gas prices are going up. I don't like it, the company doesn't like it, but it is reality. I don't understand why the carriers don't match the price increases."
The stated reason from the airline perspective is to remain competitive, but, for some, time may be running out. Bankrupt United Airlines, for example, desperately is trying to turn around its finances in order to win approval for a guarantee from the federal government backing most of a $2 billion loan package. "If fuel prices were at more typical levels, United would have reported an operating profit in April," said UAL CFO Jake Brace, in announcing a $75 million monthly operating loss and a $137 million monthly net loss.
Like United, which now expects its 2004 fuel tab to run $750 million over budget, Delta and US Airways have no fuel hedges in place to protect against rising prices. Both are considering bankruptcy filings. Continental Airlines, meanwhile, has warned of "a significant loss for 2004 and beyond" unless the revenue environment improves and/or fuel costs abate. In announcing one of its recent attempts to raise fares—a $20 each-way price hike that failed to stick—the airline indicated it soon may seek labor concessions, announce furloughs and apply for pension deficit reduction contribution relief. In light of Continental's warning, Standard & Poor's Ratings Services last month revised the airline's long-term rating outlook to negative from stable. Continental attempted yet another fare hike late last week.
Meanwhile, the Air Transport Association last month reiterated its request for a modified federal oil policy. It called on the White House to stop diverting oil into the Strategic Petroleum Reserve when the price per barrel of crude exceeds $30. Consequently, that portion of the supply—which ATA said amounts roughly to 10 percent of U.S. oil production—would be injected back into the U.S. market, bringing costs down as much as 10 percent. ATA does not advocate releasing any oil already stored in reserve.
When asked last month whether he will take any short-term steps to ease fuel prices, such as slowing shipments into the reserve, as presumed Democratic presidential candidate John Kerry has suggested, President George W. Bush said, "We will not play politics with the Strategic Petroleum Reserve."
Overseas, many airlines successfully have implemented fuel surcharges on passenger tickets, including Air France-KLM, Air New Zealand, British Airways, Qantas, airlines in the SAS Group, Singapore Airlines, SN Brussels, Swiss, Virgin Atlantic and Virgin Blue. Though low-fare carrier Ryanair did not raise prices and criticized those that did so, it acknowledged last week that fuel costs contributed to the first decrease in annual profits in seven years. "We believe the growth of low-fare air travel will not be damaged or slowed by higher oil prices, which will only hasten the demise of some of the current wave of loss-making startups and high-fare flag carriers," said Ryanair CEO Michael O'Leary.
The International Air Transport Association late last month said fuel prices were running 55 percent above 2003 levels and that its members' aggregate fuel bill for this year could increase $8 billion to $12 billion. As a result, airlines attending an IATA tariff conference late last month agreed to increase by 2 percent to 5 percent full fares on multi-carrier itineraries. An IATA spokesperson said the increase only is a reference point, and individual carriers must ask their governments to approve any rate increase within that range. The spokesperson added that many routes may not see any price increase.
Hotel Utility Costs
For the U.S. hotel industry, current "increases in utility costs could not have happened at a worse time," according to statistics prepared by the Hospitality Research Group of PKF Consulting. Given the record prices for fuel being recorded through May—although without the benefit of seeing glimmers of hope late last week when the Organization of Petroleum Exporting Countries agreed to increase production by 2 million barrels a day, effective July 1, and by another 500,000 barrels a day on Aug. 1.—PKF expected 2004 to see further increases.
Utility costs jumped 7.6 percent in 2003, following on the heels of a 7 percent hike in 2002. In addition to the cost of fuel, PKF factored costs for electricity and steam into the analysis. "These were among the greatest increases the industry has seen in the past 13 years," said Mark Woodworth, HRG executive managing director. "Not only were these costs one of the few hotel operating expenses to increase during the period, the other being insurance, but the increases coincided with declines in hotel revenue in 2002 and 2003."
Combined, hotel revenues fell slightly more than 10 percent during the period due to the decline in travel volumes resulting from the weak economy. By contrast, U.S. hotels in the first quarter of 2004 have experienced a rebound in both occupancy and room revenue, and industry analysts expect the recovery to continue to gain traction through the remainder of the year.
Not surprisingly, hotels with the most extensive facilities incur the greatest utility costs when measured on a dollar-per-available-room basis. "For example, U.S. resort hotels in 2003 averaged an estimated annual utility cost of $2,497 per available room, followed by convention hotels and conference centers," Woodworth said, noting that these types of properties also tend to earn the highest revenues.
At the other end of the lodging spectrum, midprice hotels and extended stay properties in 2003 averaged the lowest annual utility costs, at $751 and $766 per available room.