"Airlines getting creative in saving on fuel"

Thursday, February 24, 2005

Airlines getting creative in saving on fuel
By CHRIS WALSH
SCRIPPS HOWARD NEWS


In the 3 1/2 years since the Sept. 11 terrorist attacks, the nation's
airlines have cut costs dramatically to stay afloat in an industry besieged
by challenges.

Some carriers scaled back schedules, nixed free meals and reduced discounts
for senior citizens. Many slashed wages and benefits, furloughed positions
and eliminated jobs.

That has led to billions of dollars in cost savings, but rocketing fuel
prices in the past year have erased much of those gains.

Now the industry is faced with an interesting conundrum: Jet fuel is the
lifeblood of the nation's carriers, but it also threatens to sink some of
the weaker ones.

"There are too many airlines, too many seats, too many hubs," said Ray
Neidl, an analyst with Calyon Securities in New York. "A few of the carriers
likely will have to fail for the industry to recover. If fuel prices remain
high, it could speed that up."

Yet the industry isn't completely at the mercy of oil prices, which have
ballooned because of turmoil in oil-producing nations and growing worldwide
demand.

During the past year, airlines have put heavy emphasis on fuel efficiency as
they look to recover from the lingering effects of Sept. 11, massive debt
problems and intense competition that has driven down fares.

Carriers are implementing a variety of measures -- hedging fuel to lock in
lower prices, using one engine instead of two to taxi at the airport,
installing wing fins to reduce drag -- to help offset rising costs.

"Jet fuel costs in the industry are the highest they've been, while fares
are at the lowest they've been in a while," said United Airlines spokesman
Jeff Green. "In an environment as competitive as the airline industry is
today, if we want to compete and put people in seats, we need to find other
ways to reduce costs."
 
Oil prices have been highly volatile in recent years, but the sharp spike
late in 2004 blindsided the airline industry. Prices rocketed past $55 a
barrel in October, a huge increase from the roughly $30 a barrel during the
same month a year earlier.

All airlines -- from the big guys like United and Continental to smaller
low-cost carriers like Southwest and Denver-based Frontier -- felt the
ripples, as fuel costs are the industry's second-highest expense behind
labor.

For every penny increase in the cost per gallon of jet fuel, airlines can
pay millions of dollars extra annually in operating costs.

In the last quarter alone, several airlines saw their fuel costs nearly
double. Those costs meant the difference between a profit and a loss for
some carriers.

Frontier, for instance, saw its fuel expenses rise nearly 96 percent -- or
$26 million -- compared with the same period a year ago. That had a direct
effect on the low-fare carrier's bottom line: Frontier swung to an $11
million loss in the quarter vs. a $5.5 million profit in the year-ago
period.

"Without the rise in fuel prices, we would've been nicely profitable," said
Paul Tate, Frontier's chief financial officer.

Low-cost carrier JetBlue's total fuel costs almost doubled -- to $80.2
million -- during the last three months of 2004. At the same time, the
airline's net income fell by $17 million, or 87 percent.

The impact was more dramatic on the larger airlines, many of which are
struggling financially.

Bankrupt United Airlines said its fuel costs soared by $300 million, or 58
percent, during the fourth quarter. That contributed directly to its net
loss, which widened by nearly $188 million.

"The impact of increasing fuel costs has been pretty enormous on the
industry," said Michael Allen, chief operating officer of consulting firm
Back Aviation Solutions in Connecticut. "You're talking about hundreds of
millions of dollars more in expenses last year for some of the large
carriers. Many airlines have done very well in terms of restraining their
costs, excluding fuel. But unfortunately, fuel is a big part of their
costs."

Oil prices have come down a bit this year -- hovering in the
mid-$40-a-barrel range -- but they remain historically high.

In the past, airlines have simply passed higher fuel costs onto consumers by
raising ticket prices. But intense competition has kept a lid on fares,
forcing airlines to take other measures.

Some carriers have had enormous success hedging fuel -- essentially locking
in prices or maximum caps for a specified amount of time.

The process is complicated and involves long-range planning, but it can help
control fuel costs and combat volatility when done right.

Southwest, analysts say, has led the way in hedging. Last year, the low-cost
airline hedged 85 percent of its fuel, locking in prices of about $25 a
barrel.

Although the carrier's total fuel and oil expenses still rose about 30
percent last quarter -- when fuel costs reached their peak -- other airlines
were lucky if their costs didn't double.

In the fourth quarter, Southwest posted income of $56 million, compared with
$66 million in the year prior -- a modest decline when compared to the rest
of the industry.

"Obviously fuel costs can go up very dramatically," said Tammy Romo,
Southwest treasurer. "We really look at our hedging plan as insurance."

But some carriers are limited in how much they can hedge, while others --
like bankrupt United Airlines -- can't hedge at all.


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