Will Fuel Tax Hike Fares?

<H1>Will Fuel Tax Hike Fares?</H1><h3> By Jay Campbell </h3>New York - An overall 20 percent increase in fuel prices put the brakes on what could have been a runaway surge in year-over-year profits for the top 10 domestic airlines in the first quarter.

The carriers said operating expenses increased significantly--by 6.3 percent overall--mainly as a result of the fuel price increase and last October's lifting of the 4.3-cents-per-gallon federal fuel tax exemption. Still, revenues were up a hefty 9 percent and the 10 carriers took home $338.6 million in quarterly net income, a vast improvement over the $217 million loss reported in first quarter 1995.

Although profits were high, airlines exhibited a clear concern over escalating fuel prices. The airlines paid between 11.4 and 21.1 percent more per gallon of fuel during the first quarter, and all carriers except for Delta saw their cost per available seat mile (CASM) jump, some by double-digit percentages. All of the carriers, with the exception of TWA and USAir, cited fuel costs and the accompanying tax as the major factors eating away at their bottom lines.

"Without the impact of higher load factors, higher fuel prices and the imposition of the new jet fuel taxes, our CASM would have been flat compared to 1995," Northwest reported. America West said its CASM would have been 7.09 cents rather than 7.65 cents if it weren't for the higher fuel costs and return of the tax. Costs associated with higher load factors and the installation of first-class cabins were offset by higher revenue per ASM, according to the airline.

Delta's Leadership 7.5 assault on costs offset the fuel increases, but at 8.84 cents per available seat mile, the program is still a long way from its goal of 7.5 cents per mile.

According to the ultimate cost-watcher, Southwest chairman Herb Kelleher, fuel costs "significantly contributed to the 5.8 percent increase in our first-quarter 1996 unit costs. Crude oil and jet fuel prices continued to climb in April. We are currently averaging about 67 cents per gallon."

AMR chairman Robert Crandall said that although higher fuel prices, the jet fuel tax, severe winter weather and some one-time charges pushed airline costs up, "we benefited from improved load factors and stronger yields, which together produced substantially improved revenue."

The main question on the minds of many airline executives is, when will fuel prices fall again? The answer is unclear.

"The jet fuel industry appears to be shifting away from maintaining big inventories," said analyst Dan Kasper of Coopers & Lybrand in New York. "People were holding off on buying oil through the winter while waiting for Iraq to get back on the market, and it's still not clear whether an agreement will be reached with Iraq."

Compounding the supply-demand equation were the recent closing of several refineries on the West Coast and the hard winter experienced by the Northeast and upper Midwest.

"With reduced inventory, anything unexpected will result in shortages," said Tim Neale, a spokesman for the Air Transport Association, which represents 21 American carriers. "For our carriers, every penny increase in the price of fuel per gallon adds $170 million to the annual bill."

Kasper said that until late last year, fuel prices had been favorable since the Gulf War, explaining that this year's fuel shortages were unexpected for airlines. Fortunately, he said, the crunch came while the carriers were enjoying growing revenues pushed by strong domestic and international passenger counts.

Kasper also pointed out that higher costs might not necessarily translate into higher fares: "At any given time, you can assume the airlines are charging what the market will bear," he said. "Airlines need to consider what will maximize revenue, and adjusting fares based on costs doesn't do that. What has helped them is increased demand, which would be negatively impacted by higher fares."

Individual airlines are not saying whether or not they'll raise faries, except through the ATA, which has warned that a price hike is a possibility if the federal fuel tax remains in effect.

Meanwhile, ATA president Carol Hallett wrote a letter on April 30 praising Senator Robert Dole for proposing a repeal of the tax. Such a measure is being discussed in Washington as a possibility by Memorial Day. The reversal would save the carriers $500 million to $550 million per year, the ATA said.

Fuel prices and taxes aside, weather also had a major impact on profitability for the carriers in quarter one. USAir was perhaps hardest hit by winter storms. The airline said January and February results were below what was expected, but March was higher, resulting in a year-over-year 6 percent increase in revenue and a $65 million net improvement in earnings over last year. The bad news is the carrier still lost over $31 million and its CASM rose 15 percent.

"Even though USAir's costs remain the highest in the industry, these results underscore the revenue potential and inherent strength of our East Coast business," said Stephen Wolf, chairman and CEO of USAir. Wolf said he was "disappointed" with a loss in a quarter when the rest of the industry reported higher earnings.

The most profitable carrier in the quarter was American, whose parent company, AMR, reported earnings of $157 million, a 324 year-over-year increase. Continental made $88 million, followed by Northwest at $53.4 million, Southwest at $33 million and America West at $13.7 million. Delta would have reported $66 million and United $6 million in net earnings, but one-time restructuring charges skewed those numbers. TWA and Alaska both lost money but showed improvement over last year.

Looking forward, the airlines don't expect the growing traffic trend to stop, but that in large part depends on what happens with the suspended ticket tax. Fuel costs are continuing to grow and could be even higher by the end of the second quarter.

"Advance bookings indicate that second-quarter revenues should be strong," said Coopers & Lybrand's Kasper. "The economy is holding and continues to perk along, so although there are clouds in the sky, things are looking pretty good."

At least the carriers can draw comfort from the knowledge that the weather will improve-we think.