US Airline Execs Worry Over Oil Price
Prospects of USD$100-a-barrel oil sent shares of US airlines tumbling on Wednesday, renewing talk in the industry of mergers and ticket price increases as a way to hold onto profit margins.
The oil spike comes as a softening US economy begins to threaten an industry only just recovering from years of cutthroat competition and a series of bankruptcies.
"I'm not certain that where we are today is a business that can handle USD$100-a-barrel oil," US Airways Group Chief Executive Doug Parker said at a Wall Street investor conference on Wednesday.
"We've been through a painful restructuring since 2001, but we're still not fixed," said Parker.
The chief financial officer of American Airlines stressed that higher ticket prices were necessary to compensate for soaring oil.
"We've got to find a way to pass on fuel expenses to our customers," CFO Tom Horton said at the same conference. "We're going to need to keep driving costs down in order to compensate for the fuel-revenue disconnect."
The price of NYMEX crude oil futures -- directly related to the price of jet fuel -- notched a record high above USD$98.50 on Wednesday.
Northwest Airlines' chief financial officer said forecasting companies were looking at oil costing anywhere between USD$70 and USD$110 per barrel next year.
"The key for us is continued capacity discipline," said Northwest CFO Dave Davis, referring to the number of seats the airline sells, as it tries to balance costs and revenue.
Fuel rivals labor costs as airlines' biggest expense. Since 2006, carriers have offset that cost by reducing the number of seats for sale and raising fares.
But if economic weakness crimps demand, airlines must consider mergers as a way to pull capacity from their systems, said Parker, the most visible advocate for industry consolidation.
Parker, who engineered the 2005 merger of US Airways and America West, failed this year in his attempt to merge US Airways with Delta Air Lines.
Delta rejected the US Airways bid, saying it had more long-term value as a stand-alone airline. But as oil prices continue to rise and the US economy shows signs of slowing, airline leaders have shown renewed interest in consolidation.
"We do believe the right transaction for Delta would add tremendous value within the industry," said Ed Bastian, Delta's chief financial officer, at the investor conference. "If there was to be a consolidating environment, Delta has the strong hand there, and views itself as a natural acquirer, not a seller."
At the same event, Continental Airlines Chief Financial Officer Jeff Misner said Continental would not likely be the one that started the merger wave.
"Continental will not be left behind," said Misner. "We just don't necessarily have the ability to start the dominoes falling."
Continental has an unusual obstacle to consolidation -- rival Northwest holds a "golden share" in Continental that gives it the right to block mergers involving the Houston-based carrier in a shareholder vote.
The unusual relationship dates back to 2001 when Northwest agreed to sell its shares in Continental after it was sued for anti-competitive behavior by the US Department of Justice.
Misner said, however, that Continental is better positioned than most to cope with expensive fuel. Continental's relatively young fleet of more fuel-efficient planes would cushion the company from the blow of higher fuel prices, Misner said.
"It's still cheaper to fly today than it is to drive," he said.