Airlines Stay Profitable Despite Escalating Fuel Costs

 - August 1, 2011, 7:40 AM
United Continental’s fuel costs rose $1.1 billion during the second quarter. (Photo: United Continental)

Most major U.S. airlines stayed profitable in the second quarter despite dramatically higher fuel costs. Delta, United Continental, US Airways, Alaska Airlines and JetBlue all reported quarterly profit in earnings releases late last month. An exception was American Airlines, which reported a net loss of $286 million blamed in large part on fuel prices. The story sounded similar across the Atlantic. Dublin-based low fare carrier Ryanair reported first-quarter profit of $201 million, a 1 percent bump over the prior year. “Fuel prices remain stubbornly high,” it said.

Airlines said their positive results reflect surprisingly strong consumer and business passenger demand despite higher fares, new revenue initiatives such as premium seating and ongoing cost-cutting and capacity controls. But such measures only partially offset fast-rising fuel prices, which are reaching levels airlines have come to expect and consider in their planning.

Delta said on July 27 it would take several actions to “[recalibrate] its business to succeed in a permanent, high fuel price environment.” They include implementing fare increases, fuel surcharges and revenue initiatives to recover increased fuel costs through ticket prices. The Atlanta-based carrier will reduce fourth-quarter capacity in markets “where revenues do not cover higher fuel costs,” and retire 140 of its least efficient aircraft by the end of 2012, including its entire DC-9 and Saab turboprop fleets and 60 regional jets. Delta has offered severance buyouts accepted by 2,000 employees, and will consolidate 1.2 million sq ft of facilities in Atlanta and Minneapolis.

The year-over-year growth in fuel costs proved substantial, driving up operating expenses. United Continental said second-quarter fuel costs, excluding $278 million of benefit from fuel hedging, rose $1.1 billion compared with last year’s second quarter. Delta also saw additional fuel costs of more than $1 billion, American Airlines $524 million, US Airways $400 million and JetBlue $160 million. Fuel accounted for 40 percent of JetBlue’s operating expenses during the quarter. “We believe the best hedge against high fuel prices is better fuel efficiency,” CFO Ed Barnes told analysts.

Ryanair saw a competitive advantage in the situation. “High oil prices are forcing competitors to further increase their fuel surcharges and fares, which make Ryanair’s low fares even more attractive,” stated CEO Michael O’Leary. “It will also drive further consolidation, and more airlines will exit the industry. This will generate growth opportunities for Ryanair because we operate the most fuel-efficient aircraft and have the lowest operating costs.”