U.S. Airlines Struggle to Fill the Gap Left by Rising Jet Fuel Costs

It´s an exercise in wishful thinking, but many U.S. airlines that lost money in the first quarter of 2006 would have made a profit if jet fuel prices had stayed at the same level as in the first quarter of 2005.

The problem for U.S. airline executives is that someone keeps raising the bar.

Less than two years ago, some carriers still were counting on the per-barrel price of crude oil to settle in the $30s long-term. By the time executives accepted that they´d better plan for the $40s or even $50s, per-barrel prices had pushed past $60. Finally, they began basing business plans on the low to mid $60s, and prices climbed to $70.

“When we began the restructuring process last year, we prudently planned for oil prices averaging $65 per barrel in 2006, and $60 per barrel thereafter,” Northwest Executive Vice President and CFO Neal Cohen said recently. “With recent persistent record-high fuel costs, along with significant volatility in the markets, there remains great uncertainty around this key element of our plan.”

These fuel costs really sting. And it´s not just the per-barrel cost for crude; the jet fuel price increase has been even worse because the spread between the cost of crude and the refined jet fuel product is much wider than it used to be.

Northwest says every $1 increase in a barrel of oil costs it $43 million a year. American spent $1.1 billion more for jet fuel in 2004 than in 2003 and $1.7 billion more in 2005 than in 2004. The carrier expects another $1 billion increase this year.

Domestic air fares, as measured by cents paid per mile, were 12 percent higher in April 2006 than in April 2005.

But domestic air fares still are not back to where they were six years ago during the industry´s profitable heyday. And since that time, jet fuel prices have more than doubled. Northwest, which compares filling the tank of its 747-400 to filling the tanks of 2,000 SUVs, said a fill-up for its Detroit-Asia flights has increased from $48,000 two years ago to $103,400 today.

Many airlines have lightened aircraft by removing ovens, trash compactors, food galleys and seatback phones.

If prices go down, many U.S. airlines have positioned themselves to make a profit with their cost cuts, fuel efficiency, capacity constraints and fare increases.

But another refinery-threatening hurricane season is coming and perhaps a showdown with oil-rich Iran. China´s demand for oil isn´t about to decline, and U.S. demand isn´t abating.

Many U.S. airline executives confess they aren´t sure they can turn a profit with oil at $70 per barrel. And if the bar is raised on them yet again, watch out.

Most of the air traffic control modernization that could enable more efficient routings and substantial fuel savings are, at best, still many years away.

For some airlines, consolidation or liquidation could be the only answer left.