Higher U.S. Airfares Loom as Oil Climbs Toward $100

Delta Air Lines Inc., American Airlines and other large U.S. carriers may be poised to boost fares with fuel surcharges as crude oil moves closer to $100 a barrel.

“Every dollar that fuel rises erodes their earnings,” said Jim Corridore, a Standard & Poor’s equity analyst in New York. “It’s not good news to see fuel prices back up. Once we start approaching $100 a barrel, you’ll start to see fuel surcharges come back.”

Crude settled at a 2-year high today of $90.48 on the New York Mercantile Exchange, underscoring the pressure on an industry whose two largest costs are jet fuel and labor. The price will top $100 by 2011’s second half, Goldman Sachs Group Inc. forecast in a report this month.

Airlines grounded hundreds of planes, dropped routes and cut thousands of jobs in 2008 as oil surged to more than $145 a barrel and jet fuel soared to a record $4.36 a gallon. The run- up extended losses at most carriers that began in late 2007 and lasted until earlier this year.

Delta spent $5.67 billion on fuel through Sept. 30, or 26 percent of its total expenses, while AMR Corp.’s American paid $4.74 billion, or 29 percent. United Continental Holdings Inc. couldn’t get a fuel surcharge to stick this month.

“At $100 plus oil in 2011, they have to price to that on fares or surcharges or both,” Kevin Crissey, a UBS Securities LLC analyst in New York, said in an interview. “The airlines are supposed to have several years of profitability to mend their balance sheets after this last downturn, and oil is eating into that.”

Adding Surcharges

Airlines adopt surcharges for expenses such as fuel by adding a specific amount onto their existing fare structures. Carriers have said that step can be simpler than adjusting the millions of prices in their computer systems.

Jet fuel for immediate delivery in New York Harbor closed today at $2.55 a gallon, the highest level since 2008. The price has jumped 29 percent from a year earlier. The previous 12 months saw a 42 percent surge, preceded by a 48 percent plunge in late 2008 as the recession ravaged demand.

Volatility in fuel prices is the industry’s “No. 1 challenge,” Southwest Airlines Co. Chief Executive Officer Gary Kelly said.

“All you have to do is look back at the last decade to see what kind of havoc it wreaks on our industry,” he said in a Dec. 15 speech. “It is the single biggest threat to aviation.”

Crude and Fares

Every sustained $5 annual increase in the price of crude requires boosting round-trip fares about $7 to offset the cost on domestic operations,Jamie Baker, a JPMorgan Chase & Co. analyst, said in a Dec. 15 report. Only two of 10 industrywide fare increases succeeded in 2010, according to travel website FareCompare.com.

United Continental, the world’s largest carrier, was the first U.S. airline to try a fuel surcharge in 2010, raising one- way fares $10 on Dec. 6 after oil broached $89 a barrel. The Chicago-based company pulled back in most markets after Southwest, the biggest discounter, refused to match.

Seating-capacity cuts during the recession helped airlines phase out some of the cheapest tickets, so average fares inched up even as across-the-board increases fell through. The U.S. airfare consumer price index rose at least 10 percent each month from April through July, the Bureau of Labor Statistics said.

Oil’s rise may test the durability of airlines’ 2010 recovery, according to Dan McKenzie, a Chicago-based analyst with Hudson Securities.

‘Modest Amount’

“The industry has the wherewithal to offset a very modest amount of fuel-price volatility,” McKenzie said. “Where earnings estimates are vulnerable and where stocks are vulnerable is when fuel prices march up from $95 to $100.”

United, Atlanta-based Delta and Southwest, based in Dallas, all should return to profit, based on analysts’ estimates compiled by Bloomberg. Fort Worth, Texas-based AMR is the only carrier among the four largest in the U.S. still projected to lose money in 2010, according to the estimates.

The Bloomberg U.S. Airlines Index has risen 23 percent this year, almost twice the 13 percent gain in the Standard & Poor’s 500 Index.

While most airlines have planned to add back some domestic flying in 2011 as the economy strengthens, oil at $100 a barrel or more also may force them to reconsider, said Bob McAdoo, an analyst at Nashville, Tennessee-based Avondale Partners LLC.

“When you get $100 to $110, people are going to start looking at what they’re going to do to squeeze capacity down,” he said.

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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