For Airlines, War Fuels Panic

The long-suffering airline industry has always had its burdens: high labor costs, huge government taxes and inventory that's extremely difficult to manage in a downturn. But the rising price of jet fuel could be the straw that breaks the industry's back.

Wars cause the price of jet fuel to go up. Six weeks after Iraq invaded Kuwait in August 1990, the price of jet fuel more than tripled. It's no coincidence that Eastern Airlines, Pan Am and Midway Airlines ceased operations in 1991. And this time around, a convergence of global events has caused jet fuel prices to double in the past year.

"Last time, when Saddam invaded Kuwait, the price of oil spiked," said David Swierenga, economist at the Air Transport Association. "This time, oil is already sharply higher, but not due entirely to Iraq. The Venezuelan strike has as much, if not more, to do with it, and with the very cold winter, we're seeing an increased demand for heating oil, which moves in lockstep with jet fuel."

Moreover, after losing nearly $20 billion over the last two years, the airline industry isn't as well equipped to handle a fuel price increase as it was in 1991. Balance sheets have become so weak that Standard & Poor's has cut debt ratings on the entire industry. The situation is so bad that the second-largest and the seventh-largest airlines, US Air and UAL's (UAL Quote) United Airlines, are in bankruptcy and the nation's largest, AMR's(AMR Quote) American, is sitting on the verge.

The airlines aren't powerless, however. To control costs, the airlines hedge their fuel expenses, buying a contract to purchase a set amount of fuel in the future at a fixed price. While the amount of hedging varies from airline to airline, analysts say that carriers have between 40% and 60% of their fuel costs hedged for the year.