April 2005 
Volume 03, Issue 11 
Industry Wrap

Socked one more time

As oil prices rise again, numerous industries—including aviation—are feeling the effects

Socked one more timeOil prices have surged lately, affecting numerous industries including aviation. And, if the futures market is to be believed, that cost isn't going to fall a lot any time soon.

The price of a barrel of oil has been rising through 2005 and hit $56.46 on March 16, breaking the $55.67 record set in October. During oil price surges, industry observers and news reports generally focus on the immediate-delivery price of oil contracts on commodities markets. However, according to a Wall Street Journal story, the market for long-term oil delivery is sending its own message: Expect a spate of generally high prices for the foreseeable future.

"I used to think, forget it, $40 oil is not sustainable. It has to come down from there. That's what I was taught. But things have changed. The center line for oil prices is clearly moving up," said Fadel Gheit, an Oppenheimer & Co. energy analyst, in the Journal report.

And while oil is still below its all-time-peak price, which happened in 1980 and was the equivalent of about $93 in today's dollars, prices sustained above $40 would have a major impact on everyone, including flying travelers and the airlines that transport them, the Journal said.

According to the Journal, every monthly crude contract listed on the New York Mercantile Exchange is trading above $43 a barrel, going out to delivery from now until December 2010. In other words, the futures market is signaling oil prices for the next five-plus years that are above the $40 "not sustainable" mark cited by energy analyst Gheit.

That $43 mark is less than the price for upcoming months' deliveries, which are around $54. However, the prices for far-future months aren't nearly as cheap in relation to nearby months as they have been historically, the Journal said.

That trend shows how the oil market is skittish about the long term, amid rising oil demand from China and worries about terrorism.

The rise in oil prices is affecting the bottom lines of airlines, even as traffic levels are increasing.

Delta Air Lines said last month it faces a renewed threat of bankruptcy because of high fuel prices. According to a filing the airline placed with the Securities and Exchange Commission, the third-largest U.S. carrier by traffic expects fuel costs to be "substantially higher" this year than it predicted when putting together the restructuring plan that helped Delta avert a bankruptcy filing last fall. As a result, Delta said it won't be able to generate enough cash from its operations to meet all its liquidity needs in 2005, the airline said in its SEC filing.

According to the Journal, Delta said last year's business plan assumes an average fuel price of $1.22 a gallon in 2005. The newspaper also said that each additional penny of per-gallon cost will increase Delta's cash needs by $25 million. At current prices, which are about $1.50 a gallon, Delta would have to come up with an additional $750 million this year. Last year, Delta paid an average of $1.16 a gallon for fuel, up 42 percentage from 2003.

Delta's not the only airline fretting about fuel costs.

Paul Stebbins, CEO of Miami-based fuel marketer World Fuel Services, told USA Today that airline executives are "anxious and fearful."

Jet fuel prices, he told the newspaper, are much more likely to rise sharply than to fall sharply.

In that USA Today report, David Swierenga, an aviation consultant in Vienna, Va., estimated that continuation of jet fuel costs at current levels will add $600 million to airlines' operating costs for the first quarter of 2005. That's 11 percent higher than what had been budgeted. Despite an expected increase in passengers, Swierenga told USA Today he now looks for the industry to lose as much as $2.5 billion this year.

Stuart Klaskin of KKC Aviation Consulting told USA Today his airline clients are running financial simulations to anticipate the effects.

"You've got to assume the worst case," he said.

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