From the March 19, 2004 print edition of the The Business Journal of Phoenix
From the print edition
Mike Sunnucks
The Business Journal
Rising jet fuel prices are pinching airlines and other air transportation companies' bottom lines, and that's clouding the outlook for an already turbulent sector.
Jet fuel prices have shot up to more than $1 per gallon since last September's level just below 80 cents, according to the U.S. Energy Department. Jet fuel went for less than 50 cents per gallon in 1999.
That's creating headaches for airlines with tight operating margins that still are trying to shake the effects of the 2001 terrorist attacks and economic recession.
"It is a concern for us, and we continue to monitor it," said America West Airlines Chief Financial Officer Derek Kerr.
Curt Pavlicek, president of Scottsdale-based Pinnacle Air Charter, said he's seen jet fuel prices shoot up since the beginning of the year.
"We're looking at about a 15 to 20 percent increase," Pavlicek said.
Pavlicek said the rising costs are impacting airplane owners whether they be private companies or individuals.
Worries over jet fuel hikes and their negative impact on air carriers have hit airline industry stocks and dimmed financial outlooks.
However, America West rival Southwest Airlines is in the best position of major carriers when it comes to dealing with the fuel issue.
Dallas-based Southwest has 80 percent of its fuel supplies for 2004 and 70 percent for 2005 purchased in advance, or hedged, at $24 per barrel, said spokeswoman Whitney Eichinger.
That is leaps and bounds above other carriers, including America West.
Current fuel prices are at approximately $36 to $37 per barrel. "So that helps us significantly," said Eichinger.
By comparison, Tempe-based AmWest has hedged 40 percent of its first-quarter fuel needs at $32 per gallon, but only 5 percent has been bought up front for the second quarter and none for the latter half of the year.
"So we are kind of naked for the second to fourth (quarters)," said Kerr.
Kerr said Southwest's strong credit rating gives it the ability to buy more fuel up front, and as America West's financial position improves, it will be able to do the same when fuel prices decrease.
But rising fuel prices are not subsiding due to OPEC supply reductions and increased demand from China and the United States including the military.
AmWest's fuel outlook is further complicated by the fact that jet fuel supplies from California are higher than from other supply points such as the U.S. Gulf Coast and New York.
Jet fuel from Los Angeles has been near or above $1.10 per gallon compared to just under a dollar in New York and the Gulf Coast.
The higher L.A. prices put West Coast carriers such as AmWest and Alaska Airlines at a competitive disadvantage, Kerr said.
Some airlines have or are looking at hiking fares to offset the costs of jet fuel.
Kerr said AmWest has not done that and needs to ride out the high prices, though he welcomes federal proposals to slow or temporarily stop replenishment of strategic oil reserves and, instead, sell some of that fuel on the open market. The U.S. Senate has taken some action on the front.
Higher fuel prices come just as America West has gained stronger financial footing with a couple of profitable quarters and expansion of transcontinental routes from large business markets such as L.A., Boston and New York. Kerr said the fuel situation is not impacting growth plans.
Despite the fuel concerns and its impact on related companies, Scottsdale Airport Aviation Director Scott Gray said it has not yet hurt traffic or fuel sales. January saw the largest amount of jet fuel sales ever at the regional airport, 1.13 million gallons.
High crude oil prices are expected to dog the economy throughout the summer, especially in Western states such as Arizona.
Gov. Janet Napolitano and state Attorney General Terry Goddard have both written the Bush administration asking officials to look into gasoline price hikes and fluctuations.
