Airlines' 2008 forecasts feel drag from oil

The rising price of oil is prompting airlines to push up airfares as much as demand will allow and is causing them to rethink how much capacity they'll offer in 2008.

Southwest Airlines Co. chief executive Gary Kelly said Wednesday that Southwest executives "are definitely reconsidering our growth rate for next year" in light of soaring prices for oil and jet fuel.

Earlier this year, the Dallas-based carrier cut its planned growth rate from 8 percent to 6 percent. Mr. Kelly said even that reduced rate may be too much if rising fares don't cover rising fuel costs.

"Every morning, you wake up to a new record crude oil price," Mr. Kelly said as Southwest announced efforts to attract more business travelers. "I believe this morning it was over $98. The move up in futures market for next year is very significant, even though we're 70 percent hedged at $50 a barrel."

Executives from other airlines, speaking at a Goldman Sachs conference in New York, said they'll have to keep pushing through airfare increases to compensate for their higher fuel bills. The airlines can do some things to mitigate the costs, but not much, they said.

"We've got to find a way to pass on fuel costs to our customers," said Tom Horton, American Airlines Inc.'s chief financial officer.

Northwest Airlines Inc. CFO Dave Davis said that when Northwest put together a five-year business plan before exiting bankruptcy court this year, the airline had assumed that crude oil would sell for $63.50 a barrel in 2008. However, futures contracts for 2008 are selling in the high $80s, he said.

Mr. Davis said Northwest could respond to weakening demand by parking some its older, paid-off airplanes if passengers balk at paying higher fares.

"The cost to us of not flying those is relatively minimal," Mr. Davis said. "If we see a significant drop in demand, which we haven't seen yet, I think we're in a good position to respond."

Offering the opposite view was Continental Airlines Inc., which has the youngest fleet among the major U.S. network carriers at less than 10 years on average. Continental chief financial officer Jeff Misner said the carrier's airplanes use 35 percent less fuel per seat per mile than the fleet average a decade ago.

"It's a current structural advantage we have," he said.

Ed Bastian, Delta Air Lines Inc.'s president and chief financial officer, acknowledged that Delta's older MD-80s are less fuel-efficient than newer aircraft flown by some rivals.

However, leases on the latest narrow-body aircraft "cost $300,000 a month," while Delta's MD-80s have lease rates less than a third of that, Mr. Bastian said. "The ultimate efficiency is not to fly it."

A familiar theme was that big network airlines expect to add little if any capacity in domestic markets, although they continue to expand on international routes.

All the executives said they're on the alert for a falloff in demand as prices keep rising. They just haven't seen a weakening of demand yet.

"At some point, the equation tells you, history tells you that that's going to weaken, that you've got to find that point of [demand] elasticity somewhere. I'm not sure where that is, not sure if and when we hit that point," Mr. Misner said.

"But it still seems to be cheaper to fly than it is drive," he said. "If people got to get there, they got to get there."