Oil Costs 'could destroy weak Airlines'

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Oil costs 'could destroy weak airlines'

By Andrew Hill and Andrew Edgecliffe-Johnson
in New York - 8 Mar 2000 23:48GMT


Rising fuel oil prices could wipe out some weaker US airlines unless the industry raises passenger fares, Gordon Bethune, chairman and chief executive of Continental Airlines, has warned.

"I suspect there will be a couple of airlines not here at the end of this year," he told a meeting of the British-American Chamber of Commerce in New York this week.

Crude oil prices broke through the $34-a-barrel barrier in New York on Tuesday, more than triple the oil price early last year.

"It could be that $11 a barrel is a bit low, but $33 has no basis," said Mr Bethune, who said the US needed a "national energy policy" rather than a "do-nothing administration" to help control the situation.



In an effort to pass on increased costs to customers, US airlines have managed to impose air-freight surcharges but have had difficulty making fuel surcharges for passenger fares stick.

Mr Bethune indirectly blamed smaller airlines for persisting with uneconomic fares. Anti-trust rules prevent US airlines from colluding on fare increases, but the Continental chief executive said the result was that the "dumbest S.O.B. sets the price".

He said at current levels, Continental would spend $600m more on fuel this year than it did last year, when fuel costs were based on $28 a barrel. "We need to raise these prices - we will have to raise these prices - because it [oil] costs what it costs," Mr Bethune said.

Larry Kellner, Continental's chief financial officer, warned in January that if high fuel costs continued, Continental might not post a profit for the first quarter of this year. Higher fuel costs have eaten into fourth-quarter earnings at Continental and its competitors.

Airline analysts at Salomon Smith Barney estimated two weeks ago that fuel prices for the first quarter of 2000 would be an average of 63 per cent higher across the industry than a year before.

Some airlines would be harder hit than others, analysts said, because of the different hedging policies around the industry. Delta, for example, has bought about two-thirds of its fuel for 2000 at $18 a barrel, but some others have no such hedges to protect them against fuel price swings.

Although American Airlines, Delta and United were relatively well hedged, Salomon said Continental faced "awful" fuel price comparisons, and the minimally hedged Northwest, Southwest and US Airways could all see rises of 100 per cent or more in their first quarter fuel costs. Fuel typically accounts for 11-13 per cent of an airline's costs, and the rise in oil prices has prompted several analysts to cut their estimates for the sector. Rising oil prices have come at a time when industry executives had been expecting some upswing in investor sentiment.

-- Jim McAteer (jim_mcateer@hotmail.com), March 09, 2000

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