"Airlines Find Fuel Prices Tough to Swallow"

Thursday, June 3, 2004

Airlines Find Fuel Prices Tough to Swallow 
By Keith L. Alexander
The Washington (DC) Post


As fuel prices were rising sharply last month, Continental Airlines
announced plans to boost ticket prices. Several other airlines fell into
line. But when Northwest Airlines matched only select fares, the increases
failed to stick. 
 
The airlines had to swallow the costs of increasingly expensive fuel,
spoiling their chances of cashing in on an expected resurgence in air travel
this summer to levels not seen since before the Sept. 11, 2001, terrorist
attacks. Instead of digging their way out of a long downturn, the airlines
are now casting about for ways to offset the pressure of their escalating
fuel costs. Some carriers are turning again to employees for further cuts in
pay and benefits, while others are resorting to layoffs. 

In hearings before the House aviation subcommittee today, executives from
several of the nation's largest airlines will deliver the dour news: A
return to profitability for the industry isn't likely until next year, at
best. The executives, who will deliver their report on the state of the
industry to Congressional leaders, will largely blame the price of fuel,
their second-biggest expense after labor costs. 

But the executives aren't expected to ask Congress for relief from the
fuel-cost burden, which affects all industries. Instead, they will seek help
with airline-specific concerns such as a reduction in some security-related
fees and taxes. Without such help, the executives contend, the industry will
face another wave of downsizing and additional bankruptcies. 

"At this point, other than further workforce reductions or changes to wage
scales -- to the extent they can even be negotiated -- there is little the
industry can do to reduce costs," the Air Transport Association said in a
report to Congress. 

The big players in the industry also contend that while passengers are
filling seats, the airlines are making less money on those seats than in the
past because of cheaper fare driven by the growth of low-cost carriers and
the Internet. 

The industry is projected to lose $3 billion this year, according to the
ATA, in large part because of increased fuel and security costs, including a
proposed $435 million security tax hike pending in Congress. 

For every $1 increase in fuel, the airlines face an additional cost of $425
million. The nation's two largest airlines, American and United, expect to
pay $700 million and $750 million, respectively, this year in additional
fuel costs, executives from the carriers said. 

If fuel prices fail to decline, Continental is considering employee pay cuts
and layoffs in the fall . "The price of oil has taken our profitability
hopes away from us," said Gordon M. Bethune, Continental Airlines Inc.'s
chairman and chief executive. "The government ought to recognize that this
is pretty serious." 

United Airlines blamed high fuel costs for its operating loss in April. If
prices had been lower, the airline would have reported a profit during the
month, said Jake Brace, chief financial officer of UAL Corp., which owns
United Airlines. Last week, the airline rescinded a $5 fuel surcharge on
each leg of a ticket after other airlines failed to match it. 

Brace said United lost its fuel hedging positions when it filed for
bankruptcy and is now paying the full market price to fill up its jets. The
price of oil was about $40 a barrel yesterday, compared with an average
price of $19.73 in 2001, according to the ATA. 

Southwest Airlines has had better luck hedging. It has pre-purchased 80
percent of its jet fuel for this year at prices equivalent to $24 a barrel.
Even still, the carrier will pay up to $100 million more for fuel this year
than in 2003, said Gary Kelly, Southwest Airlines Co.'s chief financial
officer. 

To offset rising operating costs, Southwest -- one of the most profitable
carriers -- announced plans last month to offer early buyouts to employees.
The airline, which has 34,000 workers, wants to reduce its payroll to 32,000
employees by the end of the year, even as it adds flights, cities and 29
planes. The buyout is the airline's first offered since 1988. 

"We're trying to do more with fewer employees. We're trying to get back to
the productivity levels we've seen in the past," Kelly said.


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