As a group, US airlines entered the year hedging fuel bets, budgeting costs and pricing tickets for the price of a gallon of jet fuel to average about $3.13 throughout 2012.
Then, Iran threatened to close the Strait of Hormuz if attacked and the fuel prices soared to as high as $3.30 per gallon. The price of a barrel of jet fuel rose from about $120 on 1 January to $135 by 23 February, according to Airlines for America.
Fuel price increases are certainly nothing new in the airline industry but the unexpected jump during the first two months is placing unique pressure on US airline strategies. The consensus goal this year was to maintain or slightly reduce capacity, and let rising demand naturally increase yields. Now airlines must raise fares to match fuel prices, putting even further pressure on capacity and threatening yields.
The Fitch ratings agency has reported that US carriers have issued three broad-based fare increases already this year, with two fare hikes in February alone.
For airlines large and small across the USA, the fuel price bump caught them on their back foot. Charter operator Direct Air, for example, has suspended operations until 15 May, blaming unexpected fuel cost rises.
Southwest Airlines' profit margin had rebounded in the fourth quarter last year, but now executives expect to post a first-quarter loss, senior vice-president and chief financial officer Laura Wright says.
Southwest's mostly no-frills clientele has absorbed 10 broad-based fare increases imposed by the carrier during the past 15 months to match fuel cost increases. But that may have been two or three fare hikes too many for Southwest's usually loyal customer base.
"If you look at the last few fare increases they have become less effective," Wright told the JP Morgan airline, transportation and defence conference in March.
Not every carrier has sounded the alarm. Speaking at the same conference, JetBlue chief executive Dave Barger shrugged off a question about the impact of fuel prices on the hybrid carrier's margins. Instead of fuel cost, Barger said, JetBlue's "number one issue is really the completion factor", and that has been excellent after a warmer than usual February.
Meanwhile, Delta Air Lines chief executive Ed Bastian is more dismissive about the impact of fuel. The carrier's strategy for managing fuel focuses on "being smart about capacity deployment - only putting capacity out there where people are willing to pay the extra cost of fuel", he says.
It seems most US airlines are deploying the same tactic. As average jet fuel prices have soared almost 50% from the 2006-2010 average, airlines have become more efficiency conscious than ever. US airlines earned 28% more revenue ton miles per gallon of jet fuel in 2010 compared with 2000, according to the A4A.
Southwest has applied many of the same principles in its own operations, Wright says. In addition to the broad-based fare increases, the airline has "tactical techniques for the way we allocate our [seat] inventory", he adds. "We have been aggressive to increase fares and revenues, but it has been a variety beyond across-the-board fare increases."
Source: Air Transport Intelligence news
