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Crude oil price may soon bring rise in airfares

Delta, American and other large air carriers may be poised to boost fares with fuel surcharges as crude oil moves closer to $100 a barrel.

"Every dollar that fuel rises erodes their earnings," said Jim Corridore, a Standard & Poor's equity analyst in New York. "It's not good news to see fuel prices back up. Once we start approaching $100 a barrel, you'll start to see fuel surcharges come back."

Crude settled at a 52-week high Wednesday of $90.48 on the New York Mercantile Exchange, underscoring the pressure on an industry whose two largest costs are jet fuel and labor. The price will top $100 by 2011's second half, Goldman Sachs forecast in a report this month.

Airlines grounded hundreds of planes, dropped routes and cut thousands of jobs in 2008 as oil surged to more than $145 a barrel and jet fuel soared to a record $4.36 a gallon. The run-up extended losses at most carriers that began in late 2007 and lasted until earlier this year.

Delta spent $5.67 billion on fuel through Sept. 30, or 26 percent of its total expenses, while American paid $4.74 billion, or 29 percent.

"At $100-plus oil in 2011, they have to price to that on fares or surcharges — or both," said Kevin Crissey, a UBS Securities analyst in New York. "The airlines are supposed to have several years of profitability to mend their balance sheets after this last downturn, and oil is eating into that."

Airlines adopt surcharges for expenses such as fuel by adding a specific amount onto their existing fare structures. Carriers have said that step can be simpler than adjusting the millions of prices in their computer systems.

Volatility in fuel prices is the industry's "No. 1 challenge," Southwest Airlines chief executive Gary Kelly said.

"All you have to do is look back at the last decade to see what kind of havoc it wreaks on our industry," he said in a Dec. 15 speech. "It is the single biggest threat to aviation."

Every sustained $5 annual increase in the price of crude requires boosting round-trip fares about $7 to offset the cost on domestic operations, Jamie Baker, a JPMorgan Chase analyst, said in a Dec. 15 report.

United Continental, the world's largest carrier, was the first U.S. airline to try a fuel surcharge in 2010, raising one- way fares $10 on Dec. 6 after oil broached $89 a barrel. The Chicago-based company pulled back in most markets after Southwest, the biggest discounter, refused to match.

Crude oil price may soon bring rise in airfares 12/22/10 [Last modified: Monday, November 7, 2011 1:43pm]
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