Just as the airline industry appeared to have weathered one of the worst financial storms in its history, the clear skies ahead are turning cloudy again. After surviving a plunge in travel following 9/11, the SARS epidemic and the war in Iraq, airlines have hit a strong, new headwind from higher oil prices. The only question now is whether that cost will cut into industry profits or consumers' travel budgets through fare hikes.
Things could be worse. After losing $5.6 billion in 2003, industry losses had been expected to narrow this year to some $3.5 billion, according to analyst estimates. The latest monthly figures confirmed that improvement: U.S. airlines posted a nearly 10 percent gain in revenue in April, according to an industry figures released Wednesday. The gains were heaviest in international markets. Revenues per available seat mile — an industry benchmark — rose 9.7 percent compared to last April; for international routes, the gain was 27.4 percent, domestic revenues rose 5.2 percent.
But as those revenue numbers have risen, so too have fuel costs. With crude oil hitting $41 a barrel, airlines are scrambling to find ways to offset those costs. Every dollar increase in the price of crude takes a $280 million bite out of industry profits, according to Lehman Brothers. Jet fuel makes up as much as 15 percent of an airlines operating cost, the second biggest cost for airlines after labor.
Some airlines are trying to pass that extra cost along to consumers. Continental announced this week that it was raising fares by as much as $40 on some routes. United, Delta, Northwest, and American followed suit on some, but not all, routes. But Continental has already tried to raise fares several times this year without success, and analysts say it remains to be seen whether this round of fare hikes will stick.
“None of them has stuck so far because supply is increasing faster than demand as the carriers are putting capacity back that they removed post-9/11,” said Ray Neidl, who follows the industry at Blaylock Partners.
A lot will depend on whether low-cost carriers like Southwest — long the industry spoiler — decide to go along with fare hikes.
"I wouldn't rule out the possibility that higher fuel costs could force us to evaluate the possibility of raising some fares by a dollar or two," Chief Executive Jim Parker said in Dallas Wednesday after the company's annual meeting of shareholders.
In addition to its lower cost structure, Southwest is in better shape than many of its larger competitors because is has done a better job hedging the rise in fuel prices in the futures market. Airlines hedge those cost increases by locking in contracts that allow them to buy fuel at a fixed price, thereby dodging the recent price run-up. Analysts say one reason Southwest is better hedged is that its solid financial footing allows it to lock in contracts on better terms than competitors.
As the cost of crude has risen, airline industry analysts have trimmed profit estimates. But despite industry-wide pain at the jet fuel pump, some airlines will fare better than others. While Continental, Delta, Northwest and Alaska Air are expected to post losses for the year, analysts expect low-cost carriers like Southwest, JetBlue and America West to post profits. Those profitable carriers can better weather the jump in fuel prices without cutting fares. So consumers looking to fly routes served by low-cast carriers are less likely to see fare increases, analysts say.
Some international carriers have also announced small fare increases or fuel surcharges, including Air France, KLM, British Airways, SAS, Virgin Atlantic and SwissAir. Many carriers overseas have also hedged the rise in fuel prices, including Lufthansa (90 percent of this year's fuel bill), Air France (72 percent), British Airway (45 percent) and Virgin Atlantic (40 to 50 percent).
Asia-Pacific airlines Qantas and Singapore Airlines have also raised fare or added surcharges. Japan’s two carriers Japan Airlines and All Nippon Airways said Tuesday they were considering increases by had not yet decided whether to impose them.