Soaring Fuel Prices Erasing Profits

May 10, 2011

-By Joshua Resnek

The nation’s airlines are feeling the volatile jump in the price for jet fuel. In fact, the rapidly rising price for jet fuel is wiping out profits at the nation’s biggest airlines, a situation air industry experts claim will spare no one, big or small.

With the run-up in the price for barrel oil during the past three months reaching a high of $114 a barrel during the first week of May, United Continental Holdings, Southwest, Jet Blue and American Airlines are experiencing severe pressure in their respective airline operations.

United Continental, the world’s biggest airline, lost $213 million in the first quarter. Its fuel bill ballooned $560 million.

American Airlines lost $436 million during the first quarter.

Southwest and Jet Blue barely stayed profitable after paying their fuel bills.

Airlines have been raising fares to compensate for the higher price for fuel.

With oil reaching near to the outrageous levels of 2008 (oil reached $147 a barrel), the potential exists for the airlines to suffer huge losses.

Cumulatively, American airlines lost almost $20 billion in 2008.

However, the first week of May produced not only the highest price for barrel oil but coincidentally the biggest one-day drop in the price for barrel oil in the history of world oil speculation.

Oil dropped more than $10 a barrel at the end of the first week of May. In addition to suffering further small losses, barrel oil was hovering just under $110 a barrel at the beginning of the second week in May.

When oil jumps upward rapidly, prices for gasoline and jet fuel fly upward at the same time.

When the price plunges, as it did last week, prices remain higher as suppliers tend to deliver at the higher prices without adjusting them downward until suppliers have adjusted theirs.

Analysts say oil futures and speculation in the commodities market may find barrel oil oversold and in need of an adjustment.

But continued unrest in the Middle East, especially in Libya and Iraq and in Africa in Nigeria will continue to put pressure on barrel oil prices keeping them artificially higher even though consumption has not outstripped demand.

There are also the difficulties in non-producing Middle Eastern nations like Egypt, Tunisia, Jordan and now Syria, where revolutions are changing the political landscape with the expectation that Iran and even Saudi Arabia could be affected by Bahrein.

Even though airline profits have been cut dramatically in the first quarter, most airlines have shown dramatic increases in income due to the improving economy.

Higher air fares have produced billions more of income for the airlines – but it has all gone to the price for jet fuel.

Travel to Japan has been seriously affected by the tsunami and nuclear disaster that is ongoing in that nation.

Japan’s difficulties impact the world airline economy.

United Continental recently announced those airlines will be cutting flights to Japan by 14% in the short term.