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Hurricane Deals Double-Blow to Airlines With Cancellations, Fuel Hikes

Posted on: Wednesday, 7 September 2005, 00:00 CDT

Sep. 4--Far from the flooded streets of New Orleans, Hurricane Katrina may be adding more victims to its wrath -- airlines.

Delta Air Lines, AirTran Airways and other carriers felt the usual hurricane-related pain as they moved jets away from the storm and canceled hundreds of flights. But Katrina was far worse than the average storm because of the sharply higher fuel costs that followed, say industry analysts. They could not come at a worse time.

"Delta is already bleeding cash and at near-term risk of insolvency. The added financial pressure may hasten an already likely bankruptcy filing, which will probably occur within weeks," Standard & Poor's analyst Philip Baggaley in a report this week.

Delta, which has lost almost $10 billion since early 2001, has repeatedly warned that it will file for Chapter 11 if it can't cut enough costs or raise more cash to counter rising fuel costs that have undercut a massive turnaround plan launched last fall.

Jet fuel prices, already at record highs for months, jumped last week as the extent of Katrina's damage to the region, oil platforms, refineries and pipelines became apparent. The spot price of jet fuel rose from $1.86 a gallon on Aug. 26 to $2.21 a gallon Friday. It is about double the cost since the beginning of the year.

Last week's increase alone will add about $2 million to $3 million a day to Delta's red ink if the higher fuel costs -- now close to airlines' biggest expense -- persist.

By week's end some analysts were wondering what Delta is waiting for. One factor might be the pending $425 million sale of regional unit Atlantic Southeast Airlines to SkyWest Airlines, announced Aug. 16. Delta said the deal should close in 30 to 60 days, and the airline would likely want it done before going into Chapter 11 proceedings.

Several airlines raised fares last week to recoup some of the higher costs.

Airfare expert Terry Trippler said United raised many fares $30 round-trip and some walk-up fares $50 one-way. Delta, Northwest, US Airways and several other airlines followed with fare increases ranging from $4 to $30 round-trip, Trippler said.

However, Baggaley said airlines may have trouble raising fares much in September, one of the weakest months for the industry.

The airlines also face worries over getting enough fuel to keep flying. Both major pipelines that supply jet fuel and gasoline to Atlanta and other cities were shut down for three days by the storm.

Partial capacity was restored later in the week.

Still, several Gulf refineries could stay shut down for a month or more, and the industry fears that many offshore pipelines and other facilities were damaged by the storm.

No airlines have run out of fuel yet, said the Air Transport Association, but the oil industry, pipeline companies, airlines, government officials and shipping companies are scrambling to avert a shortage at airports in the Southeast, which averaged about six days' worth of reserves on Friday.

'Should be temporary' Hartsfield-Jackson International Airport and airline officials said they have reserves to last several days.

"Acute supply and price shocks should be temporary as import levels grow," said Roger King, an analyst with CreditSights, but he added that jet fuel supplies will remain tight enough to keep prices historically high.

"Katrina dealt a body blow to the airline industry at a time when it was already staggering from financial distress," he said.

Long term, the airlines could also be hurt by lower traffic, industry experts said. It will be months before the New Orleans and Gulfport-Biloxi, Miss., airports reopen to commercial flights, said King.

The region is likely to be economically depressed for some time, damping tourism and other travel.

He said Southwest, AirTran and Delta's Atlantic Southeast Airlines carrier are the biggest airlines at those airports, though the airports only account for a small percentage of the carriers' revenues.

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DAL, AAI, SKYW, UALAQ, NWAC, UAIRQ,

Source: The Atlanta Journal and Constitution

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