Don't expect relief from high gasoline prices by flying to your spring break vacation. Airfares already are up this year, and every sign is they'll remain high for summer vacation, too.
The same $100-plus price tag on a barrel of crude oil that's driving up prices at the pump is pushing up the price of jet fuel, prompting airlines to raise ticket prices across their systems twice since the start of the year.
The result is fares that were 4% higher Thursday than on New Year's Day, Rick Seaney, chief executive of FareCompare.com, which closely monitors prices, calculates.
By Frank Pompa, USA TODAY
"Even at the $4.48 (per gallon pump price) I paid a week ago, it was still less expensive than flying," says Lou DeLuco, who drives twice a month from his home in Phoenix for business in Los Angeles in a 2004 Malibu.
Gasoline was at $3.80 a gallon nationally on average Tuesday, according to AAA, although it's above $4 in places such as California.
The national average is edging toward the July 2008 peak of $4.11, when crude oil hit $145 a barrel before the financial collapse, according to the New York Mercantile Exchange.
Airlines, with jet fuel making up about 35% of operating costs, are in the same situation as drivers when crude oil prices rise.
Last year, airlines paid an average of about $3 a gallon for kerosene-type jet fuel. That was the highest average in decades, according to the Energy Information Administration. Last week, the price hit $3.20 a gallon.
"Fuel remains our largest and most volatile cost," says John Heimlich, chief economist for Airlines for America, the trade industry group representing the nation's biggest airlines.
U.S. airlines spent about $50.5 billion last year on fuel, up from $38.8 billion in 2010, and they raised ticket prices nine times last year, largely to offset those costs and make a profit. All major U.S. airlines except American, which sought bankruptcy protection in November, posted a profit last year .
But Southwest Airlines, the most consistently profitable U.S. carrier, said Tuesday that high fuel prices will keep it from posting a profit for the first three months of this year.
Strategizing on costs
To protect themselves against jumps in oil prices, most airlines hedge against them by buying a sort of insurance called an option. These options allow airlines to lock in a price for a portion of their fuel for several months at today's prices. So long as prices rise, options are valuable in keeping prices more stable. But if prices remain flat or fall, options are another expense for airlines.
US Airways hasn't hedged its fuel buying for years. And Frontier, after hedging last year, isn't following that strategy so far this year.
Bryan Bedford, chief executive of Republic Airways, which owns Frontier, said in a March 1 earnings call that Frontier could have "really good margins" if fuel averaged $3.30 a gallon this year and could still be profitable at $3.50 per gallon.
"It's going to remain to be seen what happens with fuel prices and fare adjustments," Bedford says.
Key to the airlines' profitability during times of surging oil prices is that they continue to balance supply and demand by not expanding the number of flights they have beyond people's willingness to fly — and pay for it.
Dealing with high fares
Planes were 83% full last year, according to the federal Bureau of Transportation Statistics, as airlines adjusted the number of seats they made available by the number of flights they scheduled and the size of aircraft they flew on routes. Planes were 69% full in 2001.
To keep planes full, says Michael Derchin, an airline analyst for CRT Capital Group, the airlines reduced capacity, or supply of seats, in the fall.
"So far, demand has been pretty strong," Derchin says.
For demand to stay strong, business travelers need to continue to fly. They are the most lucrative group of travelers because they're willing to pay higher ticket prices to fly in business and first class, and they'll pay a premium to fly at the last moment.
Business travelers aren't cutting back on travel in large numbers — yet.
But if fares continue to rise, Kevin Mitchell, chairman of the Business Travel Coalition, which represents corporate travel managers, says he thinks the situation could change toward the end of the year.
Carol Powell, 55, of Colts Neck, N.J., already is concerned about the prospect.
Powell, who works on environmental issues for a large corporation, says the business-class tickets to Brazil that she bought two weeks ago for a trip at the end of this month were $8,300 instead of the usual $7,000.
"I'm going to have a hard time with my budget this year," she says.
"I'm going to take the trips I need to take, and then at some point, I'll have to stop because I'll be out of money."
If people want to fly for vacation this summer, Tom Parsons of BestFares.com says, they need to be patient.
He advises people to look into a window from April 9 through early June in which there'll be a bit of a break in fares.
For travel later in the year, he says to look in the next few months to travel to Europe after the London Olympics close Aug. 12.
"The game this year is going to be, play within the airfare sales," Parsons says. "If you try to buy a summer deal right now, I think you'd be dollar-foolish."
Seeking alternatives
Down the line, airlines want to wean themselves from high crude oil price jumps and use alternative fuel, perhaps made from sweet sorghum, grasses or trees.
Biofuels would reduce carbon emissions from fossil fuel that are increasingly penalized, such as through a European carbon-trading plan that charges airlines for a portion of the fuel that they burn.
Airlines, manufacturers such as Boeing and airports joined with the Agriculture Department in 2006 to develop biofuels.
The goal is to grow a fuel, have it work in a plane and be available at airports for airlines to rely upon.
The Air Force spurred the process by setting a goal that half its fuel be from something other than petroleum by 2016. An F/A-18 Super Hornet flew with half biofuel in April 2010, and a Seahawk helicopter powered by half biofuel flew in September 2011.
United and Alaska airlines flew the first commercial biofuel flights in the United States in November 2011.
"We don't want to be the only industry left behind with no alternative," says Heimlich of Airlines for America.
But the day of flying routinely on fuel made from plants is years away, because suppliers are still developing the fuels and airlines are still testing them to ensure they're safe.
Staying high; costs, that is
In the meantime, consumers should be prepared to pay more to fly unless the price of oil drops, and the Federal Aviation Administration doesn't see that happening. The FAA predicts oil prices will stay above $100 a barrel this year and shoot up to $138 in the next 20 years.
Oil's price volatility is preventing even some experts from predicting where prices will go the rest of the year.
"You can bet that if oil goes up by some substantial amount because of geopolitical issues or because of shortages, you're going to have to raise the price of tickets," says Bob McAdoo, who analyzes airlines for Avondale Partners investors.
Right now, Farecompare's Seaney predicts that summer prices will be "expensive — but not overly expensive."
But he says, "At the end of the day, it'll be potential travelers who control prices by making the big decision to fly or stay at home."
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