Jet fuel costs propel airline losses

www.twincities.com Posted on Tue, Mar. 11, 2003 BY MARTIN J. MOYLAN Pioneer Press

You may wince as you fill up your car with pricier and pricier gas. But when you're buying more than a billion gallons of fuel a month, as Northwest Airlines and the nation's other carriers do, every penny increase is particularly painful.

Each 1-cent hike in the price of jet fuel costs airlines an average $180 million a year, estimates the Air Transport Association, the industry's leading trade association.

And jet fuel is about twice as expensive as it was a year ago, nudging to $1.30 a gallon this month, the ATA reports.

The industry has not seen such a price increase since the Gulf War buildup in the fall of 1990. But the nation's airlines, which lost more than $10 billion last year, are much weaker than they were then, ATA CEO James May told the Senate Committee on Energy and Natural Resources last month.

"The current fuel price increase is taking place against a backdrop of economic chaos in the airline industry," May said. "There is no cash cushion, no borrowing capacity and no apparent relief in sight."

To reduce the impact of rising fuel costs, airlines use futures contracts and other financial hedges to stabilize their fuel costs. Some airlines, including Southwest and Eagan-based Northwest, are extensively hedged — that is, insured — against fuel price shocks. Others are unprotected.

Northwest has 100 percent of its fuel needs for the current quarter hedged so that it should get jet fuel at 81 to 83 cents a gallon, well below the current spot market price.

For the year, Southwest has 83 percent of its fuel needs hedged, according to a Credit Suisse First Boston report issued last month. Northwest has 70 percent of its fuel needs hedged for all of 2003; Delta, 50 percent; American, 32 percent; Continental, 24 percent; and United and US Airways are not hedged at all, the investment banking firm says.

United's lack of hedges likely will cost the nation's second-largest airline more than $100 million in added fuel costs during the current quarter alone, UBS Warburg analyst Samuel Buttrick told the Wall Street Journal Monday.

Northwest would not discuss its fuel hedging Monday. But in its fourth-quarter earnings call in January, chief financial officer Bernard Han said NWA had a $59 million benefit from its hedges in 2002. During the earnings call, Han also said that NWA's hedges then figured put it about $80 million ahead for 2003.

Fuel is the second-largest expense for airlines after labor. Aviation fuel price increases, largely arising from chaos in Venezuela and worries about a Middle East war, will likely cost airlines several billion dollars this year, said David Swierenga, ATA's chief economist.

Hedging is a tricky and expensive business and can't totally insulate airlines from higher fuel prices, Swierenga said. If an airline guesses wrong about the direction of fuel prices, it can lose a load of money.

Late last month, Northwest, Continental, American and other airlines raised fares $10 in each direction on many routes, citing rising fuel costs.

To reduce the so-called "war premium" currently hanging over oil markets, the ATA is pressing Washington to release at least 1 million barrels per day from the nation's Strategic Petroleum Reserve.

The ATA also supports repeal of a 4.3 cent-per-gallon jet fuel tax adopted in 1993. That would save the airlines about $600 million annually.

Martin J. Moylan covers airlines and can be reached at mmoylan@pioneerpress.com or (651) 228-5479.