Fuel creeping up on airline labor costs
Record prices drive aviation gas spending into the billions
By August Cole, MarketWatch
Last Update: 2:04 PM ET April 17, 2005
SAN FRANCISCO (MarketWatch) -- Record high jet fuel prices are eroding one of the oldest adages in the airline industry: a carrier's biggest cost is its workers.
The first quarter of the year brought no relief to the industry as jet fuel prices stubbornly clung to levels hit in the fall of 2004, threatening to trigger another round of bankruptcies.
Then on April 1, spot jet fuel prices hit $1.75 a gallon, almost double the year-ago level and a new high.
Meanwhile, airlines have severely pruned their workforce and rammed through steep wage cuts, pushing up jet fuel as a percentage of overall operating costs while wages and salaries shrink.
"For the big guys, fuel costs are up around 18% of total costs. Labor costs are declining below 40% now," said Ray Neidl, airline analyst at Calyon Securities USA. "This is really historical."
In an aggressive industry restructuring to cope with lost business after the Sept. 11, 2001 attacks, airlines shed tens of thousands of jobs, mothballed hundreds of airplanes and retooled operations, from route planning to in-flight meals.
In a cruel twist, this industry-wide shakeup was not enough to guarantee the survival of some of the oldest names in the business.
Jet fuel prices have spiked before, as in the fall of 1990 when a U.S.-led coalition ramped up its military might to force Iraq's army from neighboring Kuwait, driving demand for jet fuel through the roof in the process.
But what we are seeing now is a major structural shift in the industry, says Vaughn Cordle, a pilot at United Airlines (UALAQ: news, chart, profile) and senior analyst at consulting firm Airline Forecasts. Huge pensions are underfunded by the billions of dollars and debt and aircraft financing costs keep creeping up.
According to data from the Air Transport Association, U.S. airlines' 2005 fuel bill looks set to top the more than $21 billion spent last year, when prices averaged $1.14 a gallon. In the first two months of this year, a gallon of jet fuel on the spot market fetched on average $1.29 in January and $1.34 in February. In the first 12 days of April, ATA chief economist John Heimlich found that fuel prices averaged $1.70 a gallon. According to Heimlich, each 1-cent increase raises the industry's annual operating expenses by $186 million.
Meanwhile, futures in the underlying crude oil market have yet to make a sustained move away from recent highs above $50. See Futures Movers.
Industry analysts expect the industry to lose between $1.5 billion and $2 billion in the first quarter alone, up to $500 million more than a year ago. The culprit: Fuel.
American Airlines, among the many feeling the pain, warned in March that if fuel prices don't back down it could spend more than $5 billion this year on gas alone. See full story.
Decreasing expenses is a priority as jet fuel prices mount, said American Airlines spokeswoman Lisa Bailey. "We need to be focused on how to cover the increased costs in fuel," she said.
For 2005, Calyon's Neidl predicts American's labor expenses to drop below 34% of its total costs as fuel costs near 26%.
In the fourth quarter, American (AMR: news, chart, profile) spent $1.68 billion on salaries, wages and benefits and $1.19 billion on aircraft fuel, compared with $1.6 billion for labor and $695 million for fuel a year earlier.
Record prices drive aviation gas spending into the billions
By August Cole, MarketWatch
Last Update: 2:04 PM ET April 17, 2005
SAN FRANCISCO (MarketWatch) -- Record high jet fuel prices are eroding one of the oldest adages in the airline industry: a carrier's biggest cost is its workers.
The first quarter of the year brought no relief to the industry as jet fuel prices stubbornly clung to levels hit in the fall of 2004, threatening to trigger another round of bankruptcies.
Then on April 1, spot jet fuel prices hit $1.75 a gallon, almost double the year-ago level and a new high.
Meanwhile, airlines have severely pruned their workforce and rammed through steep wage cuts, pushing up jet fuel as a percentage of overall operating costs while wages and salaries shrink.
"For the big guys, fuel costs are up around 18% of total costs. Labor costs are declining below 40% now," said Ray Neidl, airline analyst at Calyon Securities USA. "This is really historical."
In an aggressive industry restructuring to cope with lost business after the Sept. 11, 2001 attacks, airlines shed tens of thousands of jobs, mothballed hundreds of airplanes and retooled operations, from route planning to in-flight meals.
In a cruel twist, this industry-wide shakeup was not enough to guarantee the survival of some of the oldest names in the business.
Jet fuel prices have spiked before, as in the fall of 1990 when a U.S.-led coalition ramped up its military might to force Iraq's army from neighboring Kuwait, driving demand for jet fuel through the roof in the process.
But what we are seeing now is a major structural shift in the industry, says Vaughn Cordle, a pilot at United Airlines (UALAQ: news, chart, profile) and senior analyst at consulting firm Airline Forecasts. Huge pensions are underfunded by the billions of dollars and debt and aircraft financing costs keep creeping up.
According to data from the Air Transport Association, U.S. airlines' 2005 fuel bill looks set to top the more than $21 billion spent last year, when prices averaged $1.14 a gallon. In the first two months of this year, a gallon of jet fuel on the spot market fetched on average $1.29 in January and $1.34 in February. In the first 12 days of April, ATA chief economist John Heimlich found that fuel prices averaged $1.70 a gallon. According to Heimlich, each 1-cent increase raises the industry's annual operating expenses by $186 million.
Meanwhile, futures in the underlying crude oil market have yet to make a sustained move away from recent highs above $50. See Futures Movers.
Industry analysts expect the industry to lose between $1.5 billion and $2 billion in the first quarter alone, up to $500 million more than a year ago. The culprit: Fuel.
American Airlines, among the many feeling the pain, warned in March that if fuel prices don't back down it could spend more than $5 billion this year on gas alone. See full story.
Decreasing expenses is a priority as jet fuel prices mount, said American Airlines spokeswoman Lisa Bailey. "We need to be focused on how to cover the increased costs in fuel," she said.
For 2005, Calyon's Neidl predicts American's labor expenses to drop below 34% of its total costs as fuel costs near 26%.
In the fourth quarter, American (AMR: news, chart, profile) spent $1.68 billion on salaries, wages and benefits and $1.19 billion on aircraft fuel, compared with $1.6 billion for labor and $695 million for fuel a year earlier.
