By Andrew Compart
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.
Take a look at the U.S. map accompanying this article. Those increases in fuel costs per passenger per one-way flight are difficult to make up, particularly on longer routes. It’s even more pronounced for international routes, with New York-London, for example, costing about $82 more per passenger each way compared with March 2000, and Detroit-Tokyo about $152 more.
Have fares increased? You bet they have. High fuel prices have had one beneficial effect from the industry’s perspective (more like a nickel lining than silver, actually): Many U.S. airlines have cut domestic capacity in favor of more lucrative international service. Others have scaled back growth plans. And Independence Air liquidated, which left fewer seats on the market and gave airlines newfound pricing power.
Domestic air fares, as measured by cents paid per mile, were 12% 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.
Airlines have been doing a lot to try to cut their consumption. U.S. aircraft fuel efficiency has increased by more than six revenue passenger miles per gallon in five years, to 44.4 rpms/gallon, according to the Air Transport Association.
Continental, Southwest and Alaska have installed or are installing winglets -- vertical fins at the end of wings -- to reduce drag and cut fuel burn by 3%. Many airlines taxi aircraft on one engine when conditions permit. American redistributed cargo in the aircraft’s belly to move its center of gravity forward.
Many airlines have lightened aircraft by removing ovens, trash compactors, food galleys and seatback phones.
Alaska Airlines counts the children aboard each flight so it can more precisely estimate passenger weight and calculate how much fuel it needs. It estimates it will save $450,000 a year in fuel costs by switching to catering carts that weigh 160 pounds instead of 180.
The few U.S. airlines that can afford it have been ordering more efficient aircraft, and others have been grounding or ditching gas guzzlers.
American, for example, flies more gas-guzzling MD-80 aircraft than any U.S. carrier -- 327 as of the end of 2005 to Delta’s 120 and Alaska’s 26. So American is putting another 27 MD-80s into “temporary” storage this summer, It won’t bring them back if it can’t operate them profitably, and it is weighing the benefits and costs of retrofitting its other MD-80s with more efficient engines.
Alaska decided in March to transition to an all-737 fleet by the end of 2008 and retire the rest of its MD-80s by then, spending $750 million short-term but expecting to save about $115 million a year after the transition thanks to increased fuel efficiency coupled with the reductions in maintenance, training and crew scheduling that a single-aircraft fleet provides.
Northwest just decided to accelerate the retirement of its 17 remaining DC-10s, all of which will be gone by January, replaced by A330s on transatlantic routes and 747s on transpacific routes.
As an example of how such changes help, Northwest currently flies two DC-10s and an A330 on its Minneapolis/St. Paul-Amsterdam route. The A330 burns 6,100 fewer gallons one way, saving about $12,000 at today’s jet fuel prices, and can carry 25 more passengers. That’s more revenue potential at less cost.
Yet all this may not be enough.
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. The availability of Nigerian oil remains subject to sabotage, and Venezuela’s to the whims of President Hugo Chavez.
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.
To contact reporter Andrew Compart, send e-mail to
acompart@travelweekly.com.
