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News > Companies
Air customers to pay for fuel
January 21, 2000: 3:54 p.m. ET

With demand for seats still strong, most carriers announce fuel surcharges
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - Airlines are finding a source of relief for oil price shocks they've rarely tapped before: their passengers.
    With oil prices hitting a post-Gulf War high Friday, three more carriers - US Airways, America West and Trans World Airlines - announced surcharges, charging customers $20 per round-trip ticket on virtually all domestic flights.
    That meant that eight of the nine largest carriers in the country now had the charges, with only No. 7 Southwest Airlines (LUV), the Dallas-based discount carrier, holding off at this time.
    
Demand for seats opens door

    The surcharge is unique in its acceptance by the typically cutthroat airline industry, and is a sign that demand for air travel remains strong.
    The Air Transport Association report that 71.3 percent of its members' seats were filled last year, the best rate in the history of passenger jet travel.
    

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    With demand remaining strong despite the spike, airlines are in a better position to seek higher fares.
    "In the past, when we had the tremendous run up in fuel, we also had a recession," said David Swierenga, the ATA's chief economist. "Those two things together clobbered the industry. Now the economy is moving ahead, and carriers will have a little more flexibility on the pricing side."
    
Surcharge won't cover fuel hike

    Still, the surcharge, which could raise revenue of carriers by 3-to-4 percent, won't be enough to cover some of the fuel price increases, which are about 50 percent greater than a year ago.
    "My instinct tells me it'll only cover a small fraction of fuel increases," said Ray Neidl, analyst with ING Barings.
    In the first quarter of 1999, the average price of jet fuel was 45 cents a gallon. Current spot prices are about 70 cents, and Swierenga said he believes average prices in this quarter could be in the 68 to 69 cent range.
    Jim Higgins, analyst with Donaldson, Lufkin and Jenrette Securities, estimates the surcharge will only account for about 8 to 15 cents a gallon of the increase, depending upon a carrier's routes.
    
 Losses possible in 1Q

    The higher prices sent most major airlines profits down in the fourth quarter. In the first quarter, weaker carriers could be plunged into losses, even with the surcharges, Neidl said.
    "I'm still going on the assumption this is a bubble, but if prices stay where they are now, there's a good chance we could start seeing some losses," he said.
    No. 6 carrier US Airways Group (U) already has told analysts it expects another loss in the quarter, although it is also the only carrier to report losses in the two most recent periods as well.
    
Delta, United hit less by fuel hikes

    Some carriers, notably No. 3 Delta Air Lines (DAL) and leader United Airlines, have long-term fuel contracts, called hedges, that will help them keep control on the costs through much of this year.
    Delta had the most modest fuel cost increase of carriers reporting 4th quarter results so far, only a 9 percent gain, while United's parent company UAL Corp. (UAL) reported a 12 percent increase. But many of the other carriers saw fuel costs jump 50 percent or more in the most recent period.
    Delta did not call its surcharge, which took effect on tickets sold Thursday, a fuel surcharge, saying there were other increased costs being covered.
    "We're responding to the competitive position of the marketplace," said Jackie Pate, spokeswoman for the Atlanta-based carrier.
    She said that while hedging has helped control costs, the airline remains very concerned about prices and the trend.
    Higgins said it makes sense for Delta to join the surcharge rush, even if it is the best positioned on fuel. "The customer doesn't know that Delta is hedged;  all they know is at the pump prices are going through the roof," she said.
    Rules on international tariffs and fares have stopped the carriers from adding the surcharge on the more regulated international routes, but they have greater latitude to raise fares at home.
    
Southwest studying next move

    But Southwest, which saw a 71 percent increase in fuel costs in the fourth quarter, is reluctant to join the other carriers, even though its officials are studying what to do, said Ed Stewart, spokesman for the carrier.
    "Raising fares is a big deal around here, and we don't do it lightly," he said. "It's a very remote thought at this point."
    Southwest's reluctance to join other carriers has kept US Airways and TWA (TWA) from adding the charges on some routes where they compete with Southwest. Higgins said from his conversation with Southwest officials lead him to believe some more modest surcharge will eventually be announced there.
    "They won't do $10 (per trip leg)," said Higgins. "That's a huge percentage jump relative to other airlines."
    Southwest's stock was actually bucking a trend, showing gains in Friday afternoon trading. It was up 3/16, or a bit more than 1 percent, to 15-5/16. Northwest's stock was unchanged at 21-1/4, and stocks of all the other carriers were off between 1.5 and 4.5 percent. Back to top

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.