Airlines tipped to add surcharges as fuel skyrockets

Delta Air Lines, American Airlines and other large United States carriers may be poised to boost fares with fuel surcharges as crude oil moves closer to US$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 US$100 a barrel, you'll start to see fuel surcharges come back."

Crude settled at a two-year high yesterday of US$90.48 on the New York Mercantile Exchange, underscoring the pressure on an industry whose two largest costs are jet fuel and labour.

The price will top US$100 by the second half of next year, Goldman Sachs Group forecast this month.

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

Delta spent US$5.67 billion on fuel through September 30, or 26 per cent of its total expenses, while AMR's American paid US$4.74 billion, or 29 per cent. United Continental Holdings couldn't get a fuel surcharge to stick this month.

"At US$100 plus oil in 2011, they have to price to that on fares or surcharges or both," said Kevin Crissey, a UBS Securities LLC analyst in New York.

"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."

Airlines have said surcharges can be simpler than adjusting the millions of prices in their computer systems.

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

Volatility in fuel prices is the industry's "No. 1 challenge," Southwest Airlines Company chief executive 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. It is the single biggest threat to aviation."

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

United Continental, the world's largest carrier, was the first US airline to try a fuel surcharge this year, raising one-way fares US$10 on December 6 after oil broached US$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 US airfare consumer price index rose at least 10 per cent each month from April through July, the Bureau of Labour Statistics said.

Oil's rise may test the durability of airlines' recovery this year, said Dan McKenzie, a Chicago-based analyst with Hudson Securities.

"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 US$95 to US$100."

United, Atlanta-based Delta and Southwest, based in Dallas, all should return to profit, based on analysts' estimates compiled by Bloomberg.

Texas-based AMR is the only carrier among the four largest in the United States still projected to lose money this year, according to the estimates.

The Bloomberg US Airlines Index has risen 23 per cent this year, almost twice the 13 per cent gain in the Standard & Poor's 500 Index.

While most airlines have planned to add back some domestic flying next year as the economy strengthens, oil at US$100 a barrel or more may force them to reconsider, said Bob McAdoo, an analyst at Avondale Partners LLC.

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

- BLOOMBERG