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Fuel costs bedevil airlines
Rising prices endanger recovery plans

By RUSSELL GRANTHAM
The Atlanta Journal-Constitution
02/26/05

Rising fuel prices and stubbornly low fares are raising fresh anxiety about the recovery plans of Delta Air Lines and other ailing carriers.

Already in precarious financial condition, those airlines face increased risk of "widespread simultaneous bankruptcies" if fuel prices keep rising, said Standard & Poor's analyst Philip Baggaley in a report.

Other analysts have predicted Delta risks running low on cash this fall or winter if industry conditions don't improve.

After falling from its $55-a-barrel peak in the fall, crude oil prices again topped $50 a barrel this week. The price of jet fuel has risen more than 20 percent over the past three weeks, approaching last fall's record of $1.55 a gallon.

On Friday, jet fuel cost about $1.46 per gallon on the spot market, vs. last year's average of $1.15. Jet fuel is typically an airline's second-biggest expense, after labor.

Delta recently warned in a government filing that high fuel costs are exceeding projections in its turnaround plan, raising the prospect that the airline will have to offset the increase through higher fares or bigger cost cuts. Delta, which lost $5.2 billion last year, closed its Dallas hub last month and is cutting up to 6,900 jobs to slash $5 billion from its budget.

Some airlines reacted this week by raising fares. American and Delta raised fares as much as $20 round-trip to match an earlier move by Northwest Airlines.

The increase is "a step, not a leap, in the right direction," said Jamie Baker, with JPMorgan. But some airlines hadn't matched the increase, raising the possibility it might be withdrawn.

Big airlines have often tried to raise fares, only to retreat when rivals didn't match. Discount carriers, in particular, have been undercutting bigger competitors by adding flights and holding down fares.

On Friday the Air Transport Association, the big hub-and-spoke carriers' trade group, reported that members' domestic fares dropped almost 8 percent in January vs. a year earlier, to their lowest level since 1980.

Standard and Poor's on Thursday put several airlines' debt under review for a possible downgrade due to weak finances and continued pressure.

On the review list were American, Continental, Northwest and America West airlines. The debt of Delta, Independence Air and US Airways, which have been restructuring inside or outside bankruptcy, is already under review, said Baggaley.

High oil prices are taking the wind out of some airlines' shares. American's and AirTran Airways' shares have declined about 8 percent each since fuel prices began rising again three weeks ago. Delta's shares are down about 18 percent during the same period, closing Friday at $4.71, down 10 cents.

In a recent regulatory filing, Delta warned that the price of jet fuel is running well above the $1.22 a gallon that its turnaround plan needs to succeed.

Delta's operations will burn through an additional $25 million this year for each penny jet fuel goes up — or roughly $575 million if the current price held all year — "unless we are successful in offsetting some or all of this increase through fare increases or additional cost reduction initiatives," the airline said.

Saudi Arabia's oil minister told CNBC that he expects oil prices to remain in the range of $40 to $50 per barrel this year.