Airlines keep adapting to high fuel costs

For fliers, higher fuel costs are likely to translate into even higher fares

When the price of gasoline rises, consumers quickly take notice. But for airlines, fuel costs have been top of mind for years.

There are few things that affect airlines — and air fares — more than fuel costs. For the past several years, fuel price volatility has played a key role in airline decisions on everything from raising fares to cutting routes to adding baggage fees.

That’s because for airlines, fuel is the No. 1 cost, overtaking labor costs years ago. And with oil prices on the rise, the concern among airlines is rising. Jet fuel this year has averaged $3.15 a gallon — about triple the level from 2000-05, according to the government.

Airline experts like to joke that when it comes to issues of importance for carriers, fuel prices are Nos. 1, 2 and 3. Fuel costs make up about 35 percent of airline operating costs, said John Heimlich, chief economist at Airlines for America, a major airline industry lobbying group in Washington.

It’s one thing to say fuel costs are the largest cost for airlines, he said. “It’s another thing to say my largest cost is also my most volatile cost. ... That has a profound impact on my ability to operate routes profitably or not.”

What’s more, airlines plan flight schedules up to a year out. Significant changes in fuel costs during that time can turn a good plan into a bad one.

Yet in some ways, airlines may be better prepared to weather the latest storm of high fuel costs than they were in 2008, when prices last spiked before subsiding with the recession.

Atlanta-based Delta Air Lines said it now plans schedules under the assumption that jet fuel prices will remain historically high. Every penny increase in the price per gallon for jet fuel costs Delta about $40 million per year, the company said.

Last year marked “the first time in our history we fully recovered that run-up in fuel price,” Delta president Ed Bastian said during a presentation to investors in February. Delta, which is cutting flight capacity by 2 to 3 percent this year, remains cautious with its plans going forward.

“We’re willing to leave a few dollars on the table. That’s okay, as long as we’re ready for a difficult fuel environment,” Bastian said.

But there’s still no guarantee that airlines will be able to turn profits.

“When the price rises so quickly, there’s no getting away from the fact that it keeps profit margins extremely thin and vulnerable,” Heimlich said. High fuel costs also dampen demand as consumers tighten their grip on their pocketbooks.

For fliers, higher fuel costs are likely to translate into even higher fares. Airline consultant David Swierenga of AeroEcon thinks carriers will be able to boost fares to cover the cost of fuel this year.

Airlines have already been hiking fares for more than a year, and continue to try to push through price increases. The higher cost of flying is likely to come to the fore during the busy summer travel season.

“There is this price increase that sort of happened quietly, but as the oil price spikes I think it’s going to be less quiet,” said Addison Schonland, a partner with consulting firm AirInsight.

Even discount carriers that have sometimes forced others to retreat from fare hikes have gone along more often than not in the past year. For instance, when Southwest Airlines announced its acquisition of AirTran Airways in 2010, Southwest CEO Gary Kelly said the deal would bring more low fares to Atlanta.

But as Southwest launched its service in Atlanta in February, Kelly said the situation is “dynamic.”

“Fuel prices have been so volatile and that has led to more volatility in airfares also,” Kelly said. He said air fares in Atlanta should remain stable, but “if fuel prices continue to pressure us, we’ll have to evaluate what impact that would have on our pricing.”

Airlines are already levying fuel surcharges averaging nearly $450 round trip on international flights across the Atlantic, said CEO Rick Seaney. On domestic flights, travelers may see fare increases of 2 to 4 percent this year, he said.

Travelers “just won’t book when prices get too high,” Seaney said. “So it’s not as easy for airlines to push through fuel increases” as gas stations can at the pump.

Most traditional carriers such as Delta are also bringing in hundreds of millions of dollars from checked baggage fees and other charges.

“That has helped [airlines] cope with the higher fuel environment,” Heimlich said.

And carriers are cutting more routes as higher fuel costs make some flights unprofitable. Airlines have also focused harder on other expenses they can control since fuel costs are so unpredictable.

“Airlines will spend a significant amount of time and money just to shave 1 percent off fuel consumption,” and are investing in research on alternative fuels, Heimlich said. They’re also diversifying revenue and reducing the share of fixed costs they pay by using part-time labor, outsourcing work, leasing instead of owning aircraft and getting shorter-term leases for real estate.

As a result, “We’re talking about the current fuel price environment as a threat to earnings, whereas four years ago, we were talking about it as a threat to existence,” Heimlich said. “If things were left unchanged from four years ago, I think the industry would be crushed right now.”