Delta, Amer­i­can Air­lines may raise fares

The Pak Banker - - Company & Boss News -

DAL­LAS: Delta Air Lines Inc., Amer­i­can Air­lines and other large U.S. car­ri­ers may be poised to boost fares with fuel sur­charges as crude oil moves closer to $100 a bar­rel.

"Ev­ery dol­lar that fuel rises erodes their earn­ings," said Jim Cor­ri­dore, a Stan­dard & Poor's eq­uity an­a­lyst in New York. "It's not good news to see fuel prices back up. Once we start ap­proach­ing $100 a bar­rel, you'll start to see fuel sur­charges come back."

Crude set­tled at a 2-year high to­day of $90.48 on the New York Mer­can­tile Ex­change, un­der­scor­ing the pres­sure on an in­dus­try whose two largest costs are jet fuel and la­bor. The price will top $100 by 2011's sec­ond half, Gold­man Sachs Group Inc. fore­cast in a re­port this month.

Air­lines grounded hun­dreds of planes, dropped routes and cut thou­sands of jobs in 2008 as oil surged to more than $145 a bar­rel and jet fuel soared to a record $4.36 a gal­lon. The run-up ex­tended losses at most car­ri­ers that be­gan in late 2007 and lasted un­til ear­lier this year.

Delta spent $5.67 bil­lion on fuel through Sept. 30, or 26 per­cent of its to­tal ex­penses, while AMR Corp.'s Amer­i­can paid $4.74 bil­lion, or 29 per­cent. United Con­ti­nen­tal Hold­ings Inc. couldn't get a fuel sur­charge to stick this month.

"At $100 plus oil in 2011, they have to price to that on fares or sur­charges or both," Kevin Cris­sey, a UBS Se­cu­ri­ties LLC an­a­lyst in New York, said in an in­ter­view. "The air­lines are sup­posed to have sev­eral years of prof­itabil­ity to mend their bal­ance sheets af­ter this last down­turn, and oil is eat­ing into that."

Air­lines adopt sur­charges for ex­penses such as fuel by adding a spe­cific amount onto their ex­ist­ing fare struc­tures. Car­ri­ers have said that step can be sim­pler than ad­just­ing the mil­lions of prices in their com­puter sys­tems.

Jet fuel for im­me­di­ate de­liv­ery in New York Har­bor closed to­day at $2.55 a gal­lon, the high­est level since 2008. The price has jumped 29 per­cent from a year ear­lier. The pre­vi­ous 12 months saw a 42 per­cent surge, pre­ceded by a 48 per­cent plunge in late 2008 as the re­ces­sion rav­aged de­mand.

Volatil­ity in fuel prices is the in­dus­try's "No. 1 chal­lenge," South­west Air­lines Co. Chief Ex­ec­u­tive Of­fi­cer Gary Kelly said.

"All you have to do is look back at the last decade to see what kind of havoc it wreaks on our in­dus­try," he said in a Dec. 15 speech. "It is the sin­gle biggest threat to avi­a­tion."

Ev­ery sus­tained $5 an­nual in­crease in the price of crude re­quires boost­ing round-trip fares about $7 to off­set the cost on do­mes­tic op­er­a­tions,Jamie Baker, a JPMor­gan Chase & Co. an­a­lyst, said in a Dec. 15 re­port. Only two of 10 in­dus­try­wide fare in­creases suc­ceeded in 2010, ac­cord­ing to travel web­site FareCom­

United Con­ti­nen­tal, the world's largest car­rier, was the first U.S. air­line to try a fuel sur­charge in 2010, rais­ing oneway fares $10 on Dec. 6 af­ter oil broached $89 a bar­rel. The Chicago-based com­pany pulled back in most mar­kets af­ter South­west, the biggest dis­counter, re­fused to match.

Seat­ing-ca­pac­ity cuts dur­ing the re­ces­sion helped air­lines phase out some of the cheap­est tick­ets, so av­er­age fares inched up even as across­the-board in­creases fell through. The U.S. air­fare con­sumer price in­dex rose at least 10 per­cent each month from April through July, the Bureau of La­bor Statis­tics said.

Oil's rise may test the dura­bil­ity of air­lines' 2010 re­cov­ery, ac­cord­ing to Dan McKenzie, a Chicago-based an­a­lyst with Hud­son Se­cu­ri­ties.

"The in­dus­try has the where­withal to off­set a very mod­est amount of fuel-price volatil­ity," McKenzie said. "Where earn­ings es­ti­mates are vul­ner­a­ble and where stocks are vul­ner­a­ble is when fuel prices march up from $95 to $100." United, At­lanta-based Delta and South­west, based in Dal­las, all should re­turn to profit, based on an­a­lysts' es­ti­mates com­piled by Bloomberg. Fort Worth, Texas-based AMR is the only car­rier among the four largest in the U.S. still pro­jected to lose money in 2010, ac­cord­ing to the es­ti­mates. The Bloomberg U.S. Air­lines In­dex has risen 23 per­cent this year, al­most twice the 13 per­cent gain in the Stan­dard & Poor's 500 In­dex. -Bloomberg

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