Fuel Conference Report: High prices, airline backtracking, and a growing airport influence

April 8, 2003

An Imbalance With Insurance

Insurance analyst says that high rates can be offset to some degree by implementing risk control programs.

Frank Kinnett, managing director of Marsh USA Inc., told the into-plane refueling reps at this year’s Jet Fuel Conference, "The insurance companies have made a lot from your industry." He cites numbers that show in the past two years, some $440 million in premiums were paid by the refueling sector, while claims accounted for $150 million during the same period. Profit from refuelers: $92 million.

Kinnett says refuelers’ insurance rates still increased by an average minimum of 75 percent for companies that experienced no losses. Two reasons: insurance companies underpricing their own product for a period of nearly ten years and the impact of 9/11.

Dramatic premium jumps since 9/11, he says, are the result of the underwriters trying to recoup in one year’s time some $4 billion in losses from the terrorist attacks. A war with Iraq or similar future attacks will not have as hard-hitting an impact, he says, because insurers are only providing $50 million limits for war risk insurance.

Kinnett recommends that companies reduce their risk by putting in place risk control programs, particularly in light of the fact that the refueling industry inherently has high employee turnover. "Set up a triage process," he adds, for dealing with claims very quickly to get them settled before having to go through the trial process.

AirTran: Fuel Efficiency from New Aircraft Helping To Reduce Costs

Stan Gadek, chief financial officer for AirTran Airways, says the U.S. carrier is experiencing reduced overall costs as a result of bringing online a fleet of new Boeing 717s. Combined with reasonable labor costs and the efficiency of its hub and spoke system, AirTran turned a profit in 2002.

Gadek, speaking at the annual Jet Fuel Conference, says that fuel represents more than 20 percent of AirTran’s operating expenses, with the carrier using some 13 million gallons of jet fuel per month. Those numbers are being positively impacted by the introduction of the Boeing 717s, he says, with an overall improvement in fuel efficiency of 24 percent as a result. AirTran plans on replacing its fleet of DC-9-30s by the end of 2003; it currently operates 55 717s, but that number will grow to 73 by year’s end.

Gadek points out that the operating costs of the new 717s are further impacted by reduced maintenance expenditures.

"If you have low costs you can make money in this environment," comments Gadek. "We have to generate our cash flow from profitability. Cash is king."

AirTran currently operates 446 daily departures, up 37 percent since 9/11, and returned to profitability in the second quarter of 2002. The carrier hubs at Atlanta’s Hartsfield International Airport, which is also Delta’s fortress hub. Gadek says that carriers such as AirTran can still benefit from the efficiencies that a hub and spoke network can bring, something that has come more and more into question as major carriers suffer financial setbacks. What’s broken, he says, is the airline cost structure. Central to that is labor, and Gadek reports that AirTran currently has pilots and mechanics under workable contract agreements.

AirTran further controls costs via the Internet, with 45 percent of its bookings made online directly with the carrier.