‘Air fare rises to offset higher fuel cost’
By Jeremy Lemer in New York, FT, 18.01.2011
Rising oil prices are a growing burden for the airline industry but efforts to pass on higher costs to passengers should help sustain the fragile recovery under way since late 2009, according to executives at the second-biggest US airline.
“The biggest issue we are facing is the steep run-up in fuel prices since September,” Richard Anderson, chief executive of Delta Air Lines, told investors on Monday. At today’s prices, fuel could add $1bn to Delta’s costs in 2011.
Over the past two years, airlines have struggled back to profitability thanks to a moderate global economic recovery, a strong rebound in demand for travel and higher ticket prices.
On Monday, Delta reported fourth-quarter net income of $19m, or 2 cents a share, compared with a loss of $25m, or 3 cents a share, a year earlier. Profits slightly undershot analyst estimates but sales outperformed, rising 14 per cent to $7.8bn.
Delta shares fell 5 per cent to $12.12 on the news.
Analysts expect US airlines as a group to post net profits of $400m when they report earnings this week and next, the seventh fourth-quarter net profit in 25 years. But in its most recent report, the International Air Transport Association noted that while airline profit cycles usually last between seven and 10 years, “2011 may see smooth upward progression being interrupted as oil and jet fuel prices rise”.
The association is expecting airline net profits to dip from about $15.1bn in 2010 to about $9.1bn in 2011 as fuel prices move from $79 a barrel to an average price of about $84 a barrel.
Airlines have room for manoeuvre. Many have locked in lower prices through hedging, and a more efficient use of aircraft provides opportunities for savings to offset higher oil costs.
Delta plans to cut another 100 aircraft, mainly inefficient 50-seat regional jets, from its fleet over the next 18 months in addition to the 100 or so it has dropped in the past two years.
If airlines keep a tight hold on supply and the economy remains on track, Michael Linenberg of Deutsche Bank expects the industry to “recapture much of the fuel increase via higher air fares”.
In the past month, US airlines have raised prices for domestic fares three times and on international routes most airlines increased premium rates by $50 just before Christmas.
If oil prices settle in the mid-$80 range, analysts at JPMorgan argue the industry could still “support record profits”. But if they reach $100 to $120, airlines will be pushed into survival mode. -----------
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