Saturday, April 23, 2011

Spike in fuel prices erasing airline profits

Soaring jet fuel prices are wiping out profits at the nation's biggest airlines.

United Continental Holdings Inc. lost $213 million in the first quarter after its fuel bill jumped by $560 million, the world's biggest airline company said on Thursday. Southwest and JetBlue both scratched out tiny profits despite higher fuel costs.

A day earlier, American Airlines reported a $436 million loss.

With jet fuel getting close to 2008 highs, airlines have been raising fares to compensate - seven times so far this year. United Continental revenue rose 10.8 percent to $8.2 billion compared to a year earlier. Southwest revenue rose 18 percent to $3.1 billion. Higher fares covered much of the fuel increase, but not all.

Even with the industry's poor showing in the first quarter, analysts expect nearly all airlines - with the notable exception of American parent AMR Corp. - to be profitable for the full year. In 2008, when oil rose as high as $147 per barrel, the biggest U.S. airlines, excluding Southwest, lost a combined $19.24 billion.

Independent airline analyst Bob Herbst said the big reason airlines are healthier than in 2008 is fares that are at least 25 percent higher. And even though the economy is stronger now, airlines have not added an excessive amount of flying. He noted that there are fewer airlines now - Northwest and Continental have both been absorbed by bigger airlines, and AirTran is about to be. And airlines have less debt and more cash.

Also, in 2008 they were headed into a recession. This time they're headed out of one, and demand is stronger.

But will the airlines raise fares too much, and wind up scaring customers away?

Southwest, which blocked some other fare hikes, went along this week with a $10 round-trip increase but might not next time.

Southwest CEO Gary Kelly said higher fares inevitably drive away budget-conscious leisure travelers, although he said that isn't happening yet - at least on his airline. Southwest traffic jumped 11.9 percent in the quarter.

United Continental traffic fell 1 percent. CEO Jeff Smisek said explicitly that higher fares reduce demand. But a stronger mix of business traffic helps offset that.

"We run our airline with the business traveler in mind, and our business travel mix provides more stable demand, even in times of rising fares," he said.

Higher fares are covering much, but not all, of United Continental's higher fuel costs. Smisek would like higher fares to cover all of it.

"We've had not only high fuel prices, but quite volatile fuel prices. And so we've tried to chase them," he said. But traveler demand and competition ultimately determine fares, he said.

Most airlines use complex financial transactions to hedge against rising fuel prices. Hedging saved United $154 million in the first quarter. United Continental said it has hedged 46 percent of its fuel needs for this year. But hedges only do so much, and they can lose money if fuel prices drop.

United Continental's loss equalled 65 cents per share. It would have been 41 cents per share if not for merger expenses. Analysts surveyed by FactSet expected a loss of 48 cents per share. Revenue for the quarter was about the same as analysts expected.

The Chicago-based company is the product of a merger in October with Continental. It aims fly as one airline under the United name by year end.

The company said it was reducing flying to Japan by 14 percent next month compared with May 2010. Demand for travel to Japan fell sharply after the March 11 earthquake and tsunami. Passenger revenue to Japan dropped by $30 million during the quarter.

Southwest Airlines Co. earned $5 million, or a penny per share. Not counting one-time costs, Southwest met Wall Street's expectations. Southwest is buying AirTran for $1.4 billion in a deal it now expects to close on May 2. Of the five biggest U.S. airline companies, analysts expected only Southwest to report a first-quarter profit.

Among mid-sized carriers, JetBlue Airways Corp. said it earned $3 million, or a penny per share, for the quarter. It lost $1 million a year earlier. Revenue rose 16 percent to $1.01 billion.

Unlike larger carriers, JetBlue is expanding. It expects capacity to rise as much as 9 percent in the second quarter, and as much as 8 percent for the year.

Alaska Air Group Inc. earned $74.2 million, or $2.01 per share. The results included fuel hedge gains of $82 million, although because of other one-time items it would have had a profit anyway. Traffic jumped almost 16 percent for the quarter.

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