Airlines face dilemma over raising their fares

U.S. airlines are unlikely to raise fares enough to completely offset jet-fuel costs that are at their highest levels in more than a decade, pulling the industry’s shares down the most in the S&P 500.

Uncertainty over global oil supply has boosted prices since Russia invaded Ukraine on Feb. 24. The spot jet-fuel price in New York harbor has surged 57 percent since the start of 2022 to $3.61 a gallon Monday, the highest since 2008. As recently as January, the biggest U.S. airlines forecast jet fuel at no more than $2.50 or so for the first quarter.

Fuel can account for as much as a third of airline expenses when the price jumps. The increased cost — combined with the risk that demand to Europe will suffer because of the war in Ukraine — is hitting airlines just as they are counting on spring and summer trips to fill planes on domestic flights. International travel remains well below prepandemic levels of 2019.

While airlines could raise fares by reducing the number of seats available, carriers are likely to tread carefully, analysts said. Roundtrip domestic tickets are about $305, 4 percent below the average from the same time in 2019, according to Hopper Inc., a travel search engine.

“We do not expect the airlines to reduce significant amount of capacity, so expect tweaks and not cuts, which ultimately means overcoming higher fuel with price is unlikely,” Conor Cunningham, an MKM Partners analyst, said in a report Sunday. “It is certainty a start to get pricing moving in the right direction.”

Carriers have to be cautious because they are eager to recover from the pandemic’s destruction of demand in 2020 and the fuel-price spike could be shortlived, said Christopher Stathoulopoulos, an analyst at Susquehanna Financial.

“It’s a tough spot to be in, there are some tough choices to be made,” he said. “Their response has to be very thoughtful versus a knee-jerk reaction.”

While many European carriers seek protection from fuelcost spikes by locking in prices, American, United and Delta don’t use such hedging contracts on their airline operations. Southwest is an exception and has 64 percent of its fuel needs hedged for this year. Alaska Air Group Inc. hedges about 50 percent of its expected consumption.

“The current energy price environment is exactly why we have a systematic hedging program — to provide insurance in the near term,” Southwest spokesman Brad Hawkins said by email. American and United declined to comment, while Delta didn’t immediately respond to a request.