US airlines are benefiting from lower fuel prices at a time when ticket sales and demand are in a slump after the Sept. 11 terrorist hijackings.
Shares of United Airlines parent UAL Corp, US Airways Group Inc and America West Holdings Corp gained more than 10 percent on Friday as stocks across the industry rose on a drop in the price of jet fuel, the second-biggest expense for airlines after labor.
The cost benefit of the lower fuel prices is a bright spot for an industry in which third-quarter revenue fell 18 percent, mainly because of flight cancellations and fewer passengers after the attacks. Lower fuel prices may also stimulate the economy, which would help airlines by spurring more travel, analysts said.
"The drop is going to be a major help," said Paul Flemming, a senior analyst with Energy Security Analysis Inc, which provides fuel-consulting services to airlines.
Jet-fuel prices for delivery in New York harbor have fallen 36 percent since mid-September and were down 19 percent in the first four days this week on lower costs for crude oil, from which jet fuel is made. Prices for jet fuel rose a cent, or 2.1 percent, to US$0.52 a gallon.
The Bloomberg US Airline index rose 2.3 percent and dropped 18 percent since Sept. 10. UAL shares climbed 30 percent this week to US$14.24, while US Airways gained 51 percent to $6.97 and America West gained 19 percent to US$2.08.
Fuel accounts for about 20 percent of airlines' operating costs, compared with about 10 percent for other transportation companies such as trucking, Flemming said.
At United, every US$0.01 decrease in the price of jet fuel provides savings of US$2 million a month, or US$24 million a year, said spokesman Joe Hopkins.
That's normally about US$200 million a year for the industry, though perhaps US$160 million this year because of fewer flights, said Dave Swierenga, chief economist for the Air Transport Association, the airlines' trade group.
The lower prices may help lighten losses for carriers this year and next. US airlines are expected to have annual losses of US$6.4 billion this year and as much as US$2.5 billion next year, excluding aid from the federal government, according to a UBS Warburg report this week.
Southwest Airlines Co, one of the few carriers that's still expected to post a profit this year, is pleased to see the prices drop. "As prices fall, our earnings go up, there's no question about it," said Gary Kelly, chief financial officer at the Dallas-based carrier.
The price decline this week stems from a standoff between the Organization of Petroleum Exporting Countries, or OPEC, and non-OPEC nations about whether to cut oil production.
Airlines also helped push the price down when they reduced demand for the commodity by curtailing flights after the hijackings, Flemming said. The decline in travel after the attacks accelerated a slowdown in corporate travel demand that began earlier in the year.
"A consumer paying less for gasoline puts more money in his pocket to spend on other things," said Swierenga. "Hopefully some of those things would be air travel."
Some airlines try to hedge fuel costs by buying securities that will increase in value as the price of jet fuel climbs, which balances out the higher costs.
"All indications seem to show the price will continue to come down, so we'll make a determination [on future hedging] based on the economic outlook," said Patty Nowack, a spokeswoman for America West Airlines.
America West, Southwest, Delta Air Lines Inc, and US Airways were among the airlines that began hedging this year when fuel prices started declining.
"Some of them will be disadvantaged a little bit because of aggressive hedging, but the goal is to average it out over the cycle," said Mark Ray, the managing director of the fixed-income transportation portfolio at John Hancock Financial Services Inc.
"Stability and predictability is what they're after."
Continental Airlines Inc is one airline that wasn't hedging fuel costs as of last month and was relying more on lowering costs by retiring older aircraft and replacing them with newer, more fuel-efficient planes.
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