- The Washington Times - Saturday, January 5, 2008

ASSOCIATED PRESS

Rising fuel costs will be the main culprit cutting into U.S. airlines’ profits this year, with credit market turmoil and slowing passenger demand also expected to hamper the industry worldwide.

High jet-fuel prices will limit airlines’ combined profitability to between $3.5 billion and $4.5 billion in 2008, compared with last year’s estimated profit of $5 billion, the Air Transport Association said yesterday. In the meantime, the International Air Transport Association, which anticipates profits for domestic and foreign carriers to fall to $5 billion from $5.6 billion, called signs of weakening passenger demand a “warning bell” for 2008.

To bolster their finances in the face of a slowing American economy, more expensive fuel and higher borrowing costs, U.S.-based carriers must continue to improve fuel and other efficiencies while increasing their share of business and international travel, said ATA Chief Economist John Heimlich.

Higher fares also seem likely.

A spokeswoman for United Airlines said yesterday that the second-largest U.S. carrier raised domestic fares by $10 to $20 round trip to offset rising fuel costs. The move is the latest in a series airlines have attempted in recent months as the price of jet fuel soars.

Shares of major carriers were pummeled in 2007 with big drops coming at the end of the year, as oil prices climbed toward $100 a barrel — a threshold broken earlier this week. Light, sweet crude for February delivery fell $1.96 to $97.22 a barrel in on the New York Mercantile Exchange yesterday.

“Rising oil prices have a disproportionately negative impact on U.S. carriers, since oil is traded in dollars,” Mr. Heimlich wrote in an e-mail. “Foreign carriers generally have more robust hedge positions than U.S. carriers, leaving them less exposed to the soaring oil prices.”

Despite the expected decline in U.S. carriers’ profitability, a 2008 profit would mark the industry’s third straight one, which has not happened since 1998-2000 and would follow a five-year combined loss of $35 billion, Mr. Heimlich said. His profit forecast includes domestic passenger and cargo airlines, while excluding bankruptcy and other charges.

Fuel costs are now the single biggest cost for airlines, followed by labor. Jet fuel accounted for more than a quarter of U.S. airlines’ operating expenses in the second quarter of 2007, and are expected to represent about 28 percent of global expenses in 2007, according to industry officials.

Jet fuel prices hit about $2.65 a gallon in November, compared to $1.80 a gallon a year earlier, according to the U.S. Energy Department.

The international airlines’ trade group said yesterday that passenger traffic, as measured by revenue-per-kilometer flown, increased 9.3 percent in November, compared with the same month last year. Through the first 11 months of 2007, passenger traffic rose 7.5 percent compared with last year.

International air-freight demand also grew in November, but the 3.5 percent jump was down from October’s 3.6 percent growth. Through November, freight demand is up 3.9 percent compared with the year-ago period.

The outlook, however, is less rosy.

“We ring in 2008 with a warning bell,” IATA Chief Executive Giovanni Bisignani said, pointing to concerns ranging from high oil prices to the global credit crunch.

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