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Airlines get higher fuel bills just as busy summer flying season approaches

Leslie Josephs
The industry trade group Airlines for America is expecting a record 236.1 million people to take a flight between June 1 and Aug. 31, an increase of 3.7 percent compared to last summer.

More travelers are packing airplanes, but it's getting more expensive to fly them.

Jet-fuel prices have climbed 15 percent this year, and have surged around 60 percent over the past year, according to S&P Global Platts, presenting airlines with a growing fuel bill just before the summer travel rush, the busiest time of year.

Airlines have a few options to handle the spike in their biggest expense after labor: cut service or raise fares. That amounts to a game of chicken. Airlines don't want to risk losing customers to a competitor with better fares or a more robust schedule.

"I envision this like a high school dance," Jamie Baker, senior airline analyst at J.P. Morgan Chase. "It's always tricky to go first."

Making the wrong choices could risk further declines in the sector. The NYSE Arca Airline Index is down nearly 9 percent this year, while the S&P 500 is up 1.5 percent. Investors have shown they will punish airlines over even the possibility of an airfare war .

American Airlines , the world's largest carrier, trimmed its 2018 profit forecast last month, as jet fuel costs rose . CEO Doug Parker last month told investors that fares would likely rise because of the increase in fuel prices.

Airlines set prices and sell tickets often months in advance, so passengers may not be paying for the more expensive fuel, at least just yet.

Airfare during the peak summer travel season is looking cheaper than last year, according to a recent report from fare-prediction app Hopper. A trip to Europe is about $1,019, a 9 percent drop from summer 2017, while a roundtrip domestic flight is about $347, around 6 percent less than a year ago, the report said.

What comes with a ticket has changed this year though. Delta and American are taking their no-frills basic economy tickets international and will be charging for checked luggage for some of the cheapest coach-class tickets.


"You can't tell passengers: 'We're not going to fly to Rome.' "

American and some of its competitors have announced some service changes, cutting some under-performing routes. For example, American is cutting a Chicago-Beijing flight and plans to drop some South American routes.

"Those decisions are probably easier to make in this fuel environment," American Chief Financial Officer Derek Kerr said at an industry conference last week.

Kerr and his counterpart at Delta Air Lines said they would look at possible service cuts in the fall after the busy summer travel season, which they each forecast would be strong.

Airlines can't simply walk away during the most important season of the year.

"You can't tell passengers: 'We're not going to fly to Rome,' " said J.P. Morgan's Baker.

Delta Chief Financial Officer Paul Jacobson said one thing on Delta's side is an worldwide increase in revenue that the carrier generates per seat it flies a mile, a key industry metric.

That "gives us comfort that we've been able to pass that through," Jacobson said at the conference. That's good news for airlines but perhaps not for consumers.

Carriers are hesitant not to cut back on service, particularly as low-cost carriers expand their international service.

Airlines have increased capacity between the U.S. and abroad 4.3 percent in the May-July period from a year earlier, according to Planestats.com, a site of consulting firm Oliver Wyman.

"What matters more is demand"

A strong economy that has helped fuel both leisure travel demand and more lucrative business travel as so far provided cover.

U.S. airlines' net income peaked at a record $26 billion in 2015, the year after oil prices started to crater. But even with more expensive fuel in 2017, U.S. carriers' brought in about $17 billion last year, a 9 percent rise from 2016, according to the Department of Transportation.

"Fuel matters, but what matters more is demand," said Savanthi Syth, airline analyst at Raymond James.

U.S. and foreign airlines carried a record 965 million people last year, according to the U.S. Department of Transportation. This past January and February, months that are general weaker for passenger traffic, airlines transported 4 percent more passengers than the first two months of 2017.

"How the overall economy does is going to influence demand for tickets," said Gary Leff, a travel-industry analyst and author of the View from the Wing blog.