Airline fortunes fall as crude price rises

Just as they were starting to get some economic lift beneath their wings, airlines are again struggling with chronically unpredictable baggage — the price of oil.

Crude’s run-up past $100 a barrel for the first time since 2008 has the industry recalculating financial flight plans that were based on forecasts of oil at $85-$95.

The rising price of fuel “is the big looming challenge, from an industry perspective,” said Alex Marren, senior vice president of United Airlines’ Systems Operations Control and United Express.

It’s also a financial challenger for passengers, since the fuel costs are passed on to them as higher fares and more fees.

Advito, a travel consulting firm, forecasts international fares will jump 9 percent on economy seats and 8 percent in business class in 2011 compared to a year ago. U.S. domestic fares are forecast to go up 8 percent on economy seats and 5 percent for business class, according to Advito.

Marren said that for United, the world’s largest airline since it merged with Continental, a $1 increase in the price of a barrel of oil means spending an extra $100 million a year on jet fuel.

Airlines forecast oil prices of $85 to $95 per barrel for 2011, wrote Michael Derchin, principal of Stamford, Conn.-based CRT Capital Group in a recent report. Crude, the main component in jet fuel, closed at $105.02 a barrel in trading Tuesday on the New York Mercantile Exchange.

“We are clearly in the danger zone now,” Derchin wrote last week.

Airlines hedge against volatile fuel prices partly by trading oil futures contracts. By locking in future prices on barrels of oil, they gain some control over their costs for fuel, since oil and fuel prices move similarly. While hedging allows for more accurate budgeting, it’s a gamble that the airlines win only if they bet correctly on oil prices months ahead of time.

United Continental Holdings – parent company of the merged Continental and United – has hedged about 40 percent of its planned 2011 fuel consumption.

Southwest Airlines has hedges in place to protect its fuel costs against oil prices above $105 a barrel.

Even with the hedging, however, U.S. airlines will spend $15 billion more on jet fuel than the $38.8 billion they paid last year if the fuel stays above $3 a gallon, according to the Air Transport Association of America, an industry trade group. It sold for $3.20 in trading Tuesday.

The surge in fuel prices came as the industry was trying to recover from economic turbulence.

Airlines mothballed some older, less fuel-efficient planes as passenger loads fell along with the economy in 2009 and much of 2010.

Passenger traffic globally was up 8.2 percent in January compared to January 2010.

“Even with good news on traffic, 2011 is starting out as a very challenging year for airlines,” said Giovanni Bisignani, CEO of the International Air Transport Association.

Higher revenue in 2011 will help offset higher fuel costs, Bisignani, said.

But airlines still are likely to continue a modest reduction in capacity this year, for example substituting smaller planes in some markets, said David Swierenga, owner of Round Rock-based aviation consulting firm AeroEcon.

In addition to cutting costs, they’re boosting prices. In the last few weeks, airlines have raised fares as they watched oil prices rise.

“They’ve increased fares enough to cover the costs of increased fuel prices so far,” said Helane Becker, an airline analyst with Dahlman Rose & Co. in New York.

U.S. airlines raised fares at least $10 per round trip last week, the sixth attempt to bump fares since the start of this year, reported Rick Seaney, CEO of Some attempts to raise overall fares fail if an airline tests an increase and its competitors don’t follow suit.

Swierenga said higher fares might affect business travel somewhat, but are more likely to cause leisure travelers to cancel or change their flying plans.

“Maybe instead of going to Hawaii you might think about going to Florida,” he said.

Julie Thomte, vice president of consulting for Advito, the travel consultant, agreed that businesses will continue to send their employees on trips to generate more company revenue.

“I don’t believe that most companies are going to take an immediate or a draconian course of action,” she said.