U.S. airlines may start charging passengers separately for jet fuel as oil prices inch past $100 per barrel.
“I’m convinced that you’re going to see someone try to unbundle fuel this year,” said airline consultant Robert Mann.
Most U.S. airlines have a poor record of managing exposure to volatile fuel prices. Only discount carrier Southwest Airlines Co hedges most of its fuel needs, while others like AMR Corp’s American Airlines and Delta Air Lines Inc are mainly at the mercy of the market.
Fare increases, the traditional way airlines boost revenue, do not help to offset sudden surges in costs because tickets are often purchased months in advance, said Mann.
And with the U.S. economy slowing, people may balk at fare increases but a separate fuel charge could be more widely accepted as consumers themselves grapple with fuel costs.
“If fuel continues at this level, you may have a situation where an airline prices a ticket absent fuel,” said Terry Trippler of TripplerTravel.com. “Other than that they really don’t have a lot of options (to offset higher fuel costs).”
Continental Airlines said it does not comment on pricing strategies or fare construction, and other airlines were not immediately available or did not respond to requests for comment.
Southwest said it plans to keep its current pricing strategy without separate fuel charges. “We feel that’s the more honest approach,” said Southwest spokeswoman Beth Harbin.
“Our hedge positions are our insurance for the type of fuel price that we see in the market today,” Harbin said. “It allows us to predict or plan for the fuel expense that we’ll have even years out.”
There have been tentative first steps to get U.S. travelers accustomed to paying extra for fuel. UAL Corp’s United Airlines added a $5 fuel surcharge to domestic flights in November and doubled it in December.
If airlines do unbundle fuel costs from ticket prices, it would not be the first time. During the energy crisis of the late 1970s, charter airlines had separate fuel charges that were set just before takeoff.
“It was done before and very successfully,” said Trippler. ”This is something that is inevitable if fuel continues where it’s at.”
No hedge
Airlines, however, could have avoided their current predicament had they locked in fuel costs when oil prices were lower. But U.S. carriers have been hesitant to hedge in part because it ties up cash.
Others equate hedging, which helped Southwest post consistent profits even during the industry’s five-year downturn, with gambling.
“We have a very focused hedging strategy, which basically locks in our fuel cost for tickets as they are sold so that we have a fixed or known margin on sales,” said Continental spokesman Dave Messing. “Other forms of hedging are basically betting.”
Continental had hedged about 32 percent of its fourth-quarter fuel needs as of December 10, roughly in line with other major carriers. Southwest, by contrast, has 90 percent of its fourth-quarter fuel hedged at very favorable rates.
Without control over fuel costs, which vie with labor as airlines’ biggest expense, more and more routes become unprofitable, forcing cutbacks.
In December, Continental said it would scale back domestic capacity slightly in 2008 because of higher fuel prices.
Overall, the No. 4 U.S. airline, which is expanding international routes, expects capacity to grow 2 percent to 3 percent this year, down from an earlier forecast of 3 percent to 4 percent growth.
Similarly, Delta plans to cancel the equivalent of 10 domestic mainline aircraft and 35 regional jets by grounding planes and reducing utilization this year, which would reduce 2008 domestic capacity by 4 percent to 5 percent.
Southwest also plans to slow its capacity growth to about 4 to 5 percent in 2008 — about half its earlier plans.