Airlines Brace for Headwinds

The term "crack spread" has turned into a curse for airlines.

The spread, which measures the additional cost of refining crude oil into the jet kerosene that fuels planes, ballooned after Hurricanes Katrina and Rita knocked out refineries around the Gulf Coast.

Airlines don't need any added pressure. They've already suffered almost two years of rising crude prices and an abundance of competition preventing individual carriers from lifting fares enough to offset fuel bills.

Even though crude oil prices have fallen almost 15% from record highs touched just after Katrina slammed into Louisiana and Mississippi, they remain high at above $60 a barrel. Plus, the crack spread for a barrel of fuel is painfully wide, at around $22, and it's been as high as $30 in recent days; the average from 1990 through 2004 was $5, notes Vaughn Cordle, an airline pilot and founder of AirlineForecasts, a consulting company based in Washington.

Third-quarter results from several airlines last week illustrate the impact from the double-punch of high crude prices and crack spreads. AMR's (AMR) American Airlines, the world's largest carrier according to passenger traffic, paid $204 million more for fuel in the latest quarter than it would have had jet fuel stayed at the second-quarter average. Total operating expenses were $5.45 billion.

Meanwhile, fuel -- traditionally airlines' second-largest cost after labor -- became the biggest expense at Continental Airlines (CAL) last quarter.

Airlines forecast that things will get worse during the fourth quarter because the full period will reflect post-hurricane crack spreads, while only one month of the third quarter did. Gerard Arpey, American Airlines' CEO, predicted last week that jet fuel prices will rise 24% in the fourth quarter from the third, costing the airline an additional $353 million.

Losing Big

All told, the surge in the crack spread, combined with high crude prices, will leave the 12 biggest U.S. airlines paying $9.6 billion more for all of 2005 than they did in 2004, Cordle estimates.

Full-year losses will be staggering.