A headlong upwards rush in the price of crude oil is not only making carriers see red but also forcing them to raise fares in a desperate bid to stay afloat. Most large American carriers increased fares by a significant amount late this week.
Travel on United Airlines, Delta Air Lines and American Airlines, will see travellers now paying from $10 to $60 more for round-trip domestic tickets - the higher charge will apply to trips of more than 1,500 miles whilst the lower charge will be applicable for trips of less than 800 miles.
They hope that increased fares will help alleviate the pressure caused by oil surpassing $130 per barrel.
This has naturally forced industry analysts to ponder the question if revenue sources for airlines, as they stand, are enough for them to cover the cost of the product. Or have carriers reached the breaking point?
Though crude prices retreated to $131.70 per barrel by Friday, it needs to be kept in mind that crude was $66 per barrel in May 2007. Since airliners run on jet fuel and not crude oil, the cost goes up further as jet fuel after refining is $173 per barrel – that is $42 more than the price of crude, and also $83 more than it cost a year ago.
These figures are according to the Air Transport Association.
With the existing revenue structure no longer sufficient to sustain operational costs, airlines have begun to exercise all possible options to raise cash. They are raising fares, reducing capacity and postponing route expansion plans.
United projects it will spend $2 billion more on fuel in 2008 than it spent in 2007. It has already asked the US Department of Transportation to postpone its scheduled June launch of daily non-stop flights from San Francisco International Airport to Guangzhou, a highly coveted route that it had won for itself in September last year.
So also, US Airways, which is postponing a lucrative Philadelphia-to-Beijing route, and Northwest Airlines, which is asking the government to suspend some cargo services to China. All airlines have cited the phenomenal rise in fuel price as the reason for the postponements.
If projections are anything to go by, US airlines will spend nearly $60 billion on fuel in 2008, compared with $41.2 billion in 2007 and $16.4 billion in 2000, according to the Air Transport Association.
The association said that with the $18 billion to $19 billion difference between 2007 and 2008 fuel prices, 244,000 people could be employed by the airlines and 261 narrow-body jets could be purchased. It said the portion of an airline ticket needed to pay for fuel has risen from 15 percent in 2000 to 40 percent in 2008.
So far, eight US airlines have closed shop since the end of 2007 and a ninth, Frontier Airlines, though still operating, has filed for bankruptcy protection. More than 9,000 US airline employees have lost their jobs so far this year, and additional cuts are inevitably on their way, the Air Transport Association said.
Analysts go so far as to predict that of the six major US carriers - United Airlines, Continental Airlines, American Airlines, Northwest Airlines, Delta Air Lines and US Airways – at least two might be in bankruptcy by year's end.
There is an exception to this gloomy picture, however. The eternally profitable Southwest Airlines, which continues being profitable for 35 long years. Analysts say this is largely because of fuel hedging. For 2008, Southwest has 70 per cent of its fuel hedged at approximately $51 per barrel. For 2009, it's hedged at more than 55 per cent at $51, and for 2010, it's hedged at nearly 30 per cent, at $63 per barrel.
For some analysts the question to be asked is why other airlines are unable to follow Southwest's example?