US fliers may face separate fees for jet fuel
U.S. airlines may start charging passengers separately for jet fuel as oil prices inch past $100 per barrel.
By Agencies |
NEWYORK: U.S. airlines may start charging passengers separately for jet fuel as oilprices inch past $100 per barrel. "I'm convinced that you're going to seesomeone try to unbundle fuel this year," said airline consultant Robert Mann.Most U.S. airlines have a poor record of managing exposure to volatile fuelprices. Only discount carrier Southwest Airlines Co hedges most ofits fuel needs, while others like AMR Corp's American Airlines andDelta Air Lines Inc are mainly at the mercy of the market.
Fare increases, thetraditional way airlines boost revenue, do not help to offset sudden surges incosts because tickets are often purchased months in advance, said Mann. And withthe U.S. economy slowing, people may balk at fare increases but a separate fuelcharge could be more widely accepted as consumers themselves grapple with fuelcosts. "If fuel continues at this level, you may have a situation where anairline prices a ticket absent fuel," said Terry Trippler of TripplerTravel.com."Other than that they really don't have a lot of options (to offset higher fuelcosts)." Continental Airlines said it does not comment on pricingstrategies or fare construction, and other airlines were not immediatelyavailable or did not respond to requests for comment.
Southwest said it plans tokeep its current pricing strategy without separate fuel charges. "We feel that'sthe more honest approach," said Southwest spokeswoman Beth Harbin. "Our hedgepositions are our insurance for the type of fuel price that we see in the markettoday," Harbin said. "It allows us to predict or plan for the fuel expense thatwe'll have even years out." There have been tentative first steps to get U.S.travelers accustomed to paying extra for fuel. UAL Corp's United Airlines addeda $5 fuel surcharge to domestic flights in November and doubled it in December.If airlines do unbundle fuel costs from ticket prices, it would not be the firsttime.
During the energy crisisof the late 1970s, charter airlines had separate fuel charges that were set justbefore takeoff. "It was done before and very successfully," said Trippler. "Thisis something that is inevitable if fuel continues where it's at." NO HEDGEAirlines, however, could have avoided their current predicament had they lockedin fuel costs when oil prices were lower.
But U.S. carriers have beenhesitant to hedge in part because it ties up cash. Others equate hedging, whichhelped Southwest post consistent profits even during the industry's five-yeardownturn, with gambling. "We have a very focused hedging strategy, whichbasically locks in our fuel cost for tickets as they are sold so that we have afixed or known margin on sales," said Continental spokesman Dave Messing. "Otherforms of hedging are basically betting." Continental had hedged about 32 percentof its fourth-quarter fuel needs as of Dec. 10, roughly in line with other majorcarriers. Southwest, by contrast, has 90 percent of its fourth-quarter fuelhedged at very favorable rates. Without control over fuel costs, which vie withlabor as airlines' biggest expense, more and more routes become unprofitable,forcing cutbacks.
In December,Continental said it would scale back domestic capacity slightly in 2008 becauseof higher fuel prices. Overall, the No. 4 U.S. airline, which is expandinginternational routes, expects capacity to grow 2 percent to 3 percent this year,down from an earlier forecast of 3 percent to 4 percent growth. Similarly, Deltaplans to cancel the equivalent of 10 domestic mainline aircraft and 35 regionaljets by grounding planes and reducing utilization this year, which would reduce2008 domestic capacity by 4 percent to 5 percent. Southwest also plans to slowits capacity growth to about 4 to 5 percent in 2008 -- about half its earlierplans.
Fare increases, thetraditional way airlines boost revenue, do not help to offset sudden surges incosts because tickets are often purchased months in advance, said Mann. And withthe U.S. economy slowing, people may balk at fare increases but a separate fuelcharge could be more widely accepted as consumers themselves grapple with fuelcosts. "If fuel continues at this level, you may have a situation where anairline prices a ticket absent fuel," said Terry Trippler of TripplerTravel.com."Other than that they really don't have a lot of options (to offset higher fuelcosts)." Continental Airlines
Southwest said it plans tokeep its current pricing strategy without separate fuel charges. "We feel that'sthe more honest approach," said Southwest spokeswoman Beth Harbin. "Our hedgepositions are our insurance for the type of fuel price that we see in the markettoday," Harbin said. "It allows us to predict or plan for the fuel expense thatwe'll have even years out." There have been tentative first steps to get U.S.travelers accustomed to paying extra for fuel. UAL Corp's United Airlines addeda $5 fuel surcharge to domestic flights in November and doubled it in December.If airlines do unbundle fuel costs from ticket prices, it would not be the firsttime.
During the energy crisisof the late 1970s, charter airlines had separate fuel charges that were set justbefore takeoff. "It was done before and very successfully," said Trippler. "Thisis something that is inevitable if fuel continues where it's at." NO HEDGEAirlines, however, could have avoided their current predicament had they lockedin fuel costs when oil prices were lower.
But U.S. carriers have beenhesitant to hedge in part because it ties up cash. Others equate hedging, whichhelped Southwest post consistent profits even during the industry's five-yeardownturn, with gambling. "We have a very focused hedging strategy, whichbasically locks in our fuel cost for tickets as they are sold so that we have afixed or known margin on sales," said Continental spokesman Dave Messing. "Otherforms of hedging are basically betting." Continental had hedged about 32 percentof its fourth-quarter fuel needs as of Dec. 10, roughly in line with other majorcarriers. Southwest, by contrast, has 90 percent of its fourth-quarter fuelhedged at very favorable rates. Without control over fuel costs, which vie withlabor as airlines' biggest expense, more and more routes become unprofitable,forcing cutbacks.
In December,Continental said it would scale back domestic capacity slightly in 2008 becauseof higher fuel prices. Overall, the No. 4 U.S. airline, which is expandinginternational routes, expects capacity to grow 2 percent to 3 percent this year,down from an earlier forecast of 3 percent to 4 percent growth. Similarly, Deltaplans to cancel the equivalent of 10 domestic mainline aircraft and 35 regionaljets by grounding planes and reducing utilization this year, which would reduce2008 domestic capacity by 4 percent to 5 percent. Southwest also plans to slowits capacity growth to about 4 to 5 percent in 2008 -- about half its earlierplans.
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