Airlines Grapple with Fuel Price Surge

 - March 11, 2011, 10:15 AM
Australia’s Qantas increased its fuel surcharge for destinations in the UK and Europe from $95 to $145. [Photo: Airbus]

The spike in global oil prices brought about in no small measure by the unrest in the Middle East has driven the price of jet-A above $3 a gallon, prompting airlines throughout the world to adjust their air fares in an effort to compensate. According to the Air Transport Association, $3 jet fuel would raise U.S. airlines’ 2011 fuel bill by some $15 billion. Last year’s fuel bill for U.S. airlines totaled $38.8 billion.

“According to Deutsche Bank, Gulf Coast jet fuel closed just above $3.00 per gallon on February 25,” said ATA spokesperson Victoria Day. “Every $1 increase in a barrel of oil costs the airlines $405 million to $430 million. Fortunately, demand continues to be strong. Airlines continually evaluate how best to respond to such price volatility.”

The response so far has proved predictable. British Airways increased all long-haul fuel surcharges by £10 ($16.28) per sector, resulting in total surcharges ranging from £63 ($102.55) to £108 ($175.80), depending on seat class and sector length. Australia’s Qantas increased its fuel surcharge for destinations in the UK and Europe from $95 to $145. Just this past Wednesday Singapore Airlines announced it would raise its fuel surcharges by between $2 and $26 per sector. Even low-fare carrier JetBlue imposed a surcharge of $35 per sector on flights to and from Puerto Rico and $45 each way on flights to and from other points in the Caribbean.

At one point, it appeared that price increases implemented by low-fare carriers might determine to what level the U.S. majors would raise their fares. But by last week, the likes of American, Delta and United-Continental parted company with their low-fare competitors by raising prices yet again, after slashing earlier increases in half in response to less drastic hikes by Southwest and Frontier Airlines, for example.

Fortunately, due to improved margins, many airlines, for now, can exploit some fairly limited price flexibility. Nevertheless, “it remains to be seen whether the industry can raise fares further to cover [the rising] cost of oil without seeing an equal demand destruction,” said Bryan Bedford, CEO of Frontier’s parent company, Republic Airways. “There’s no question about it; $100 a barrel oil will mean airlines will have to refocus, tighten their belts on capacity and show some discipline.”

Now trading at more than $100 a barrel, oil prices have forced the industry to do just what Bedford suggested. “For each dollar it increases, the industry is challenged to recover $1.6 billion in additional costs,” said Giovanni Bisignani, IATA director general and CEO. “With $598 billion in revenues, $9.1 billion in profits and a profit margin of just 1.5 percent, even with the good news on traffic, 2011 is starting out as a very challenging year for airlines.”