For the first time since the
Persian Gulf War
oil crisis nearly a decade ago, U.S. airline passengers will soon pay for the rising cost of fuel.
Five major domestic airlines have quietly decided this week to add $20 to the price of a roundtrip ticket to offset the impact of rising jet-fuel prices. The surcharge, set to take effect next month, is meant to diminish one of the biggest expenses in the airline industry.
Some airlines may resist the surcharge, which could ultimately mean the airlines that want to impose it might have to scrap the plan for competitive reasons. But with oil prices at the highest level in nine years, it's likely that the surcharge will not go away in the foreseeable future.
"It looks like the chances are 75% to 80% it will stick," said James Higgins, an analyst at
Donaldson Lufkin & Jenrette
, noting that
Delta Air Lines
had recently joined
in their decision to add the charge.
On Tuesday, Continental, the nation's fifth-largest airline, led the pack, saying it would impose the surcharge effective Feb. 1 for domestic flights only. A Continental spokeswoman declined to elaborate on the carrier's decision to impose the surcharge.
Continental had warned that if high fuel costs persist without a jump in revenue, the company might not post a profit in the first quarter of 2000.
The rising price of crude oil has been accompanied by inflation in refined-petroleum products, and jet fuel has risen sharply in the U.S. Prices have risen more than 20% this month alone.
United, American and Northwest followed Continental's lead, but it was Delta's decision to implement a surcharge that has raised the likelihood the surcharge will stick.
Delta said it was imposing the surcharge because of what it called competitive conditions in the market, not because of the rising price of fuel.
The airline is considered to have an aggressive fuel-hedging strategy in place for 2000, meaning that a jump in fuel prices would not have such a dramatic impact on earnings.
Hedges protect airlines against a jump in fuel prices by allowing the companies to buy fuel at preset prices.
Despite Delta's relatively strong position, Higgins said Delta opted to go along with the surcharge because it would only gain from the extra revenue.
"Why shouldn't Delta go along with it?", asked Higgins, adding that Delta's decision was likely based on the belief that the number of customers would not fall off as a result of a jump in fares.
Melissa Abernathy, spokeswoman for
American Express Corporate Services
, one of the largest corporate travel agents, said she hoped the airlines would rescind the unusual fare surcharge once oil prices started falling.
The last time airline carriers instituted a fuel surcharge was during the 1990-91 Gulf War, when fuel prices skyrocketed.
Abernathy noted, however, that the additional charge would only amount to a 0.3% rise on the average domestic one-way fare and wasn't likely to deter people from flying or changing their considerations when it comes to choosing a carrier.
As for the airlines, the surcharge would easily help them offset some of the impact of higher fuel expenditures.
"If a $10 surcharge (one-way) went through it would be equivalent to a 3% to 4% across-the-board domestic increase," said Brian Harris, an analyst at
Salomon Smith Barney
, adding that such a fare increase could raise pretax earnings by 10% to 15% in 2000.
The flat surcharge will also favor short-haul carriers since shorter flights burn less fuel.
Airline stocks were mixed Thursday. Continental was up 1/4, or 0.7%, at 36 3/16 and
, parent of American, rose 1 1/16, or 1.79%, to 60 7/16.
, the parent company of United Airlines, was down 1 13/16, or 2.89%, at 60 13/16, Northwest fell 1/4, or 1.16%, to 21 5/16 and Delta was off 1 5/8, or 3.2%, at 49 1/8.