Fuel Prices . . . Going Up

Allegiant, Fuel, Skybus, Southwest

It’s earning season, and most airlines are doing their best to mask their weak fourth quarters. It’s hilarious to see the headlines talking about what a great year it was. Then they bury their fourth quarter loss down below.

Just today, we saw US Airways and Alaska talking about how fuel prices are choking them. US Airways said, “Our fourth quarter results were materially impacted by increases in fuel prices. Had our fuel price per gallon simply remained at last year’s fourth quarter levels, our 2007 fourth quarter fuel expense would have been approximately $230 million lower.” And Alaska? “The loss was driven primarily by skyrocketing fuel costs combined with fares that have not kept pace.”

Just in case you’re a visual person, let’s take a look at some graphs showing what’s happened to fuel. Once again, I turn to government data for the answers. This time, it’s Schedule P-12A. Oh man, just the name makes me think it’s going to be interesting . . . riiiiiight.

Anyway, I isolated 16 of the airlines and graphed them below. Unfortunately, government data only goes up through September 2007 so far, but you get the point.

08_01_24 fuelcosts

As you can see, they all follow the same trend . . . up, up, up. I know some of the colors are light, but with the exception of some early spikes by Hawaiian and a couple other airlines I’ll talk about in a second, they all moved together. Prices hovered below $1 a gallon until early 2004 at which point they took off like an empty 757 in a headwind. (Maybe I should stay away from the analogies.) Prices passed $2 toward the end of 2005 and except for a couple of dips back, they’ve stayed there. Ouch.

Let’s focus in on some of the exceptions. I’ve taken the 16 lines and put them into an average. Then I’ve highlighted Southwest, Allegiant, and Skybus.

08_01_24 fuelcosts2

As you can see, we’re looking at these airline for different reasons. Starting in 2004 when fuel prices took off, Southwest kept them low. How? They bought a bunch of fuel hedges keeping their future cost of fuel less than they’d have paid normally. Though the prices have continued to climb, they have continued to keep their prices lower than average, and that is pretty much why they’ve continued to be profitable. With average fuel costs, I believe Southwest would have been break-even at best last quarter.

In case you’re wondering, they’ve continued to hedge fuel. It looks brilliant when prices keep rising, but when (if) they fall, Southwest will be stuck paying more than others. Personally, I think that’s fine. It’s worth having some certainty in your fuel costs even if you end up paying a little more.

The other two airlines, on the other hand, are highlighted for paying way above the average. Allegiant seems to be paying through the nose for fuel. Considering that they operate fuel thirsty MD80s, this is really costing them dearly. The fact that they remain profitable is even more impressive with that knowledge.

Then we have Skybus. They seem to be paying the most of all. They like to call themselves an ultra-low cost carrier, but, um, this clearly shows otherwise. I’m not sure why they’re paying so much. It can’t be because they’re new – Virgin America is new and they fall into the pack. Maybe it’s all these small airports they fly where nobody else goes. Come to think of it, they share that characteristic with Allegiant. Hmmm.

Well at least the trends look good, right? Of course not. You see the average fuel cost in that graph was maybe around $2.10 or so. Well just to give you some numbers . . . Alaska paid $2.48 in the fourth quarter. US Airways paid $2.56. And it doesn’t look better elsewhere.

So just remember, if you’re complaining about your ticket price being too expensive . . . pipe down. It should probably cost you even more than that.

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5 comments on “Fuel Prices . . . Going Up

  1. The file is at home and it’s in a pretty ugly state. If you want to grab it quickly, it’s an easy download from BTS here.

  2. You answered your own question. As someone who used to plan fuel purchases for a charter airline I can tell you that smaller airports almost always will charge more for fuel. Supply and demand and all that. Plus, you can’t spread out the distribution costs effectively. Especially if they don’t order jet A-1 all that often and have to bring it in specifically for your operation. Obviously, Skybus will be the largest purchaser at places like GYY, IAG and SWF, so they’ll be in a decent position to negotiate a discount, but nothing like the competition at ORD.

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