All Eyes on Fuel Prices

As oil prices have climbed and topped $100 a barrel, one can’t help but reflect on the fuel spike of 2008 — a circumstance that sent most airline earnings spiraling into the red. Just as signs of strength have returned to the industry — added capacity, improved traffic figures, more encouraging profit outlooks — fuel prices have once again posed a formidable threat.

The industry, of course, has been paying attention. The International Air Transport Association downgraded its profit outlook for the year from $9.1 billion to $8.6 billion on account of rising fuel costs. According to the association, oil prices are expected to be about 20 percent higher in 2011 than 2010, representing 29 percent of total operating costs.

The association noted that the higher prices are more likely to affect Asia-Pacific and Latin America regions. In North America, the profit outlook has remained unchanged. “Higher oil prices will damage profitability in 2011, but earlier cuts in capacity have led to much stronger conditions for yields than elsewhere. The US economy has also been stronger than expected. Compared to our December forecast, better revenues in 2011 will offset higher fuel costs,” according to the association in its release.

Even so, North American carriers have begun to brace for the impact with some introducing fuel surcharges on flights — and such price increases aren’t likely to stop. As recently reported by the Chicago Tribune, airlines are also looking closely at trimming capacity. United announced plans to reduce domestic capacity by 5 percent in the fourth quarter.

Fuel prices will likely remain a top concern for the industry in the coming months as figures continue to fluctuate. With lessons from ’08 looming, it is hoped that carriers can remain fiscally strong through this latest challenge.