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Drop in Jet Fuel Costs Has Airline Industry Looking Up

Posted on: Monday, 8 January 2007, 06:00 CST

By Dan Reed

Gulf Coast jet fuel has dropped to its lowest price in nearly 13 months, and may be headed lower. That's boosted the outlook for a troubled U.S. airline industry in 2007 and has stoked investors' demand for airline stocks.

The bottom hasn't exactly fallen out of the regional market, where more than half of the USA's jet fuel is sold. But Gulf Coast jet fuel prices are down 17% in just a month, according to private tracker Oil Price Information Service.

The Friday closing price of $1.624 a gallon was the lowest since Dec. 20, 2005, says OPIS' Ben Brockwell. In the first week of October in 2005, airlines were paying an average price that was $1.34 a gallon higher.

The drop in Gulf Coast jet fuel prices, and similar drops in the jet fuel sold in the West Coast and New York markets, has generally followed the decline in the price of the crude oil from which it's made.

Oil closed at $56.31 a barrel in New York on Friday, up 72 cents. During Friday trading, crude reached a 19-month low -- $54.90 -- before rebounding. A month ago, oil was trading above $65.

Oil prices are falling to a large extent because a mild winter in the Northeast has limited demand, Brockwell said.

For many airlines, fuel in the last two years has become the largest cost, eclipsing labor costs. The U.S. airline industry has just completed its first profitable year since 2000, and lower fuel costs have brightened the 2007 industry outlook and heartened investors.

Years of cost-cutting, limited investment in new aircraft, and discipline in limiting the growth of the industry's flying capacity are combining with strong travel demand to push the industry back solidly into the black.

Even with a broad stock market decline on Friday, the Amex Airline index was up nearly 2% over three trading days last week. The index is up 5% over two weeks, vs. a flat Standard and Poor's 500-stock index for the period.

Shares of Continental and JetBlue airlines closed Friday at $45.67 and $15.38, respectively, both near the high end of their 52-week trading range.

The good news on the fuel-price front comes as analysts grow more bullish about the airlines' 2007 outlook.

Calyon Securities' Ray Neidl expects U.S. carriers to earn about $6 billion this year, more than double the $2.3 billion that he estimates they earned in 2006.

Jamie Baker, an analyst at JPMorgan Securities, in a research note to clients last week said surprisingly strong travel demand in December and a recent fare hike by low-price leader Southwest in more than 30% of its markets strengthened his already optimistic outlook.

The Southwest increase shows an acceptance of higher fares among travelers, he says. U.S. airlines will begin reporting results for 2006 next week. (c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.

Source: USA TODAY

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