=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2004/03/22/f= inancial0848EST0020.DTL --------------------------------------------------------------------- Monday, March 22, 2004 (AP) Airlines weather fuel-price rises with new jets MELANIE TROTTMAN, and (03-22) 05:48 PST (AP) -- DANIEL MICHAELS The Wall Street Journal The recent increase in fuel prices is taking a heavy toll on the still-recovering airline industry -- but the pain isn't nearly as great as it might have been a few years ago. As airlines have slashed capacity and sliced costs in response to weak business travel, they also have parked older gas guzzlers and upgraded their fleets with smaller, more efficient jets. The result: Many airlines are in a much better position to weather this increase. "Thank goodness we have more fuel-efficient fleets because otherwise we'd even be more up the creek," says John Heimlich, chief economist for the Air Transport Association, the trade group representing U.S. carriers. The improved efficiency is especially important for airlines because they have been unable to raise fares much in the last two years. With demand for travel still sluggish and as competition intensifies between discount and full-service airlines, efforts to add a fuel surcharge have failed. Continental Airlines recently tried to raise fares about $10 each way, but backed off when competitors didn't match the move. Still, steeper fuel prices are taking a toll. Delta Air Lines said recently that higher fuel expenses and weak revenue would result in a wider-than-expected first quarter loss. Continental Chief Executive Gordon Bethune also recently blamed fuel prices in warning that the Houston airline isn't likely to break even this year, as it had hoped. Even so, Continental, which has the second-youngest fleet among the 10 major U.S. carriers, is in better shape than it was a few years ago. Last year, it burned 25 percent less fuel per available seat mile than five years earlier, primarily due to a newer fleet, says spokeswoman Julie King. Excluding regional jets, Continental's planes on average are 7.8 years old, down from 11.2 years in March 1999, according to Back Aviation Solutions, a consulting firm in New Haven, Conn. If Continental had flown its 2003 flight schedule using the 1998 fleet, = it would have paid an estimated $265 million more for fuel, Ms. King says. Aircraft manufacturers such as Boeing Co. have been outfitting planes wi= th engines that get more mileage -- and they are marketing that fact. Boeing, for example, says its next-generation 737 jet is 30 percent to 40 percent more fuel-efficient than its 727 because of improved engines and aerodynamics. U.S. carriers had lagged behind most airlines around the world in modernizing their fleets. Following U.S. deregulation of its airline industry in 1978 and the ensuing market turmoil, many U.S. carriers delayed investing in new aircraft and only caught up in the 1990s. Many counterparts elsewhere in the world were already well down the fleet modernization path. In 2002, U.S. airlines got an average of 42 passenger miles per gallon, double the mileage of two decades ago, according to the Air Transport Association. A passenger mile represents one passenger carried one mile. "As the fleets have evolved, there has been an eye toward improving fuel efficiency, and it's worked," says Southwest Airlines Chief Financial Officer Gary Kelly, whose airline operates an all-Boeing fleet. "The 727 was a three-engine airplane with a three-person cockpit, and the successor aircraft, the 737, has a two-engine airplane and a two-person cockpit," he says. Southwest started retiring its least fuel-efficient planes in late 1996, and will complete the retirement next January, Mr. Kelly says. In addition, most European airlines have pretty thoroughly modernized their fleets over the past five or 10 years, and low-cost carriers such as Ireland's Ryanair and Britain's easyJet PLC fly only new-generation planes. But the main catalyst for fleet modernizations was the Sept. 11, 2001, terrorist attacks. Hammered by a huge, world-wide drop in travel demand and revenue, the industry grounded several hundred planes, parking or retiring those that tended to require more fuel and maintenance. Delta Air Lines, for example, retired its Boeing 727s in a matter of months instead of over a planned three-year period. The terrorist attacks also brought about extreme cost-cutting measures. AMR Corp., parent of American Airlines, says better-than-expected improvements in its other expenses, including its bitterly contested cuts in staffing and benefits for employees, are largely offsetting the recent increase in fuel prices. For that reason, rising fuel prices will only slightly increase AMR's estimated first-quarter unit costs, or the average cost the carrier pays to fly one seat one mile. The airline still expects unit costs to be 17 percent lower than a year ago. However, the higher prices may delay a return to profitability for many carriers. UBS Investment Research analyst Sam Buttrick last week adjusted his financial forecast for the U.S. industry to a loss of $2.3 billion this year from a previously estimated loss of $500 million. The increase in fuel prices was part of the reason. After averaging $20 a barrel between 1992 and 2001, average crude oil prices rose to $26 a barrel in 2002 and $31 in 2003. For the first quarter of this year, though, prices are projected to average $35 a barrel, the Air Transport Association says. Spot prices are hovering around $38. With fuel the second-biggest airline expense after labor, a $1-a-barrel increase in the price of crude translates to an estimated $425 million a year in added fuel expense for U.S. airlines. Outside the U.S., long-haul air carriers are also feeling the fuel-price increase along with the pain of the weak dollar, which lowers their dollar-denominated revenue when it is converted to their local currency. British Airways recently predicted that its fuel bill for the next fiscal year, starting April 1, will rise by GBP 50 million, about $90 million, or roughly 6 percent. Meanwhile, the British pound has strengthened significantly against the U.S. dollar. A BA spokeswoman says the weak dollar has a "negligible" impact because the airline's dollar-denominated costs are offset by significant dollar-denominated revenue. Some foreign carriers are somewhat insulated because they don't rely on the dollar. European budget carriers Ryanair and easyJet get almost no revenue in dollars. "We're not losing sleep over it," says easyJet spokesman Toby Nichol, speaking of the fuel-price increase. London-based easyJet has protective price hedges against roughly 90 percent of its fuel bill for the next six months. "The price of fuel is basically being offset by the weakness of the dollar," Mr. Nichol says. "We're in the money for the time being." ---------------------------------------------------------------------- Copyright 2004 AP