Airline industry adds fuel cost surcharges - American, Airborne follow Air Canada
www.nationalpost.com Paul Vieira Financial Post Saturday, February 22, 2003
A number of major U.S. airlines and courier services announced yesterday they are being forced to slap on extra charges for their services to offset the rising cost of oil.
American Airlines, a unit of AMR Corp., announced it would add a US$20 charge on round-trip domestic tickets to cover the rising cost of fuel. The move matches an across-the-board surcharge levied by Northwest Airlines Corp. Other airlines have, or are expected to, follow suit.
Air Canada spokeswoman Laura Cooke said her airline moved Thursday to impose a fuel surcharge on trans-border, or U.S.-bound, flights of $14.30 one-way or $28.60 on a round trip. The Montreal-based airline already has a $15 fuel charge on domestic flights and it is set to impose a similar levy on international flights. Air Canada has said in the past that a US$1 increase in a barrel of oil adds $40-million to its costs.
WestJet Airlines Ltd., which tries to keep air fares as low as possible to attract demand, was compelled earlier this year to add its first-ever fuel surcharge.
Airlines are not the only ones feeling the pinch of high fuel costs.
Airborne Inc., the No. 3 express shipper in the United States, said it will raise its fuel surcharges for plane and truck customers.
A barrel of West Texas intermediate, the standard benchmark for oil, closed yesterday at US$3x.xx, inching closer to highs not seen for 13 years. Besides fears of war in Iraq, the other two big factors driving up the price of oil are the slow export recovery in Venezuela and a tight supply-demand balance.
Seattle-based Airborne said the levy for U.S., Canadian and international air express shipments will rise on March 3 to 5.1% from 4.3%. Also on that date, it said, it will raise its fuel surcharge for ground shipments to 1.8% from 1.3%.
Airborne rivals FedEx Corp. and United Parcel Service Inc. have also announced higher fuel surcharges effective March 3.
"Volatility in the Middle East and the threat of war has caused a sharp rise in fuel prices, one that is not expected to be short-lived," said Carl Donaway, Airborne's chief executive. "As fuel prices rise in the marketplace, it causes a considerable increase in our operating expenses."
Patricia Mohr, vice-president of economics for Bank of Nova Scotia, said added fuel charges are the norm when oil prices climb. "[Oil] has really gone up past $30 since last year," she said. "It's quite high ... And the airlines are quite sensitive to fuel prices."
Ms. Mohr said railways and truckers, who engage in export trade, may have to increase rates charged to recover added fuel costs. Of course, consumers are seeing the effect of surging oil prices at the gas pumps, where gas prices in the mid-80¢ range for a litre is the norm across the country.
However, she added the fuel surcharges are likely a temporary measure, and will be removed once the price of oil drops.
But how soon that will be is in question. UBS Warburg issued a report yesterday saying it was increasing its oil price forecast for 2003, to US$28 a barrel from US$25, and 2004, to US$22.50 from US$21.50. It cited as its main reason for the upward revision the "crawling pace" of recovery in Venezuelan oil production and exports.
Exports are at barely half the pre-strike levels of three million barrels of oil a day. And the continuing refusal of Hugo Chavez, Venezuela's president, to reinstate workers of the state-owned oil company "means the industry lacks the technical expertise and the funds to restore operations quickly," UBS said.
For the airline industry in particular, the high oil prices could not have come at a worse time. Airfares in Canada and the United States are hitting lows not seen in more than a decade, due to increased competition from no-frills players and an effort to spark demand.
Major airlines continue to lose money, and some executives have said that a war with Iraq would cause such a falloff in already-weak air traffic that they would be forced to ask for government aid to stay in business.