Spike in fuel prices erasing airline profits

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

The world’s biggest airline company, United Continental Holdings Incorporated, said on Thursday that it lost $213m in the first three months of the year after it paid nearly $600m more for fuel than in the year-ago quarter.

Associated Press reported on Thursday, that American Airlines posted a $436m loss. Like other airlines, American uses complex financial transactions to hedge against rising fuel prices.

But these hedges only do so much to control the airlines’ single biggest cost. Hedging saved American Airlines $100m in the first quarter, but its fuel bill still rose by $351m.

Even a profit machine like Southwest Airlines Company, and rival low-cost carrier JetBlue Airways Corporation, barely rose above break-even after paying to fuel their planes.

The rising costs offset revenue gains that ranged from nine per cent at American to 18 per cent at Southwest.

The run-up in fuel prices is reminiscent of 2008, when oil also surged above $100 per barrel. But the airlines are in better shape to withstand an oil shock than they were then.

The big difference is fares. They’re at least 25 per cent higher now than in 2008, an independent airline analyst, Mr. Bob Herbst, said.

And even though the economy is stronger now, airlines have not added an excessive amount of flights.

He also noted that there were fewer airlines now — Northwest and Continental have both been absorbed by bigger airlines. The airlines also have less debt and more cash.

Back in 2008, people were taking odds on which airline would be forced into bankruptcy first. There’s not much of that chatter now.

Even though they lost money for the first quarter, and analysts have lowered their once-rosy forecasts, most airlines are expected to make money this year. The exception is American.

Source : Punch