Surging oil costs eat into airline's profits

on Thursday, April 21, 2011

Surging oil costs eat into airline's profits  Over the course of this year, the price of crude oil has soared as political instability has swept through the Middle East and North Africa, resulting in the toppling of governments in Tunisia and Egypt. As investors grow increasingly concerned about supply disruptions while violence rages throughout the region, companies are beginning to feel the pinch of higher oil prices, Reuters reports.

This week, businesses throughout the world are reporting their earnings from the first three months of 2011. A number of U.S. airlines reported earnings on Thursday and, though some beat the expectations of Wall Street analysts because of higher fares, climbing oil prices ate into profit margins.

United Continental, which is the parent company of American Airlines, said on Thursday its profits and revenue were down during the first three months of this year on weaker demand for travel to Japan following the devastation caused by the earthquake and tsunami that struck the country on March 11.

Moreover, Southwest Airlines, a Wall Street darling for its seemingly endless streak of posting quarterly profits, reported a lowered quarterly profit this week. The company affirmed soaring energy costs squeezed its profit margins. Morningstar analyst Basili Alukos said that Southwest performed well during the quarter, but that rising oil prices ate into the inroads the company has made.

"Revenue was up nicely, led mostly by higher ticket prices, while surging fuel costs erased almost all of the profitability," Alukos said in an interview.

Airlines have moved in the past year to hike fees and charge for services that were once free. For example, many airlines, including American Airlines and Virgin America, now charge passengers for checked bags, while other airlines have eliminated free food service, charging for snacks. Those price increases helped soften the blow of the higher oil prices.

At the beginning of the year, crude oil traded around $90 per barrel; on Thursday, light crude for June delivery settled at $112 per barrel. Airlines have paid nearly $3 billion more in fuel costs so far this year when compared to 2010, according to the Air Transport Association. Like other industries, airliners are offsetting those climbing business costs onto consumers as they look to shore up their profit margins and please shareholders.

American Airlines said on Wednesday it will curb capacity later this year to combat the rising fuel costs. Delta and US Airways are set to report their earnings next week and industry watchers are anxiously waiting on quarterly results. Alaska Air Group and Jet Blue reported quarterly profits this week for the last fiscal quarter, with the former handily beating estimates while the latter  met expectations.

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