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Refining Jet Fuel Gets Costlier for U.S. Airlines

Posted on: Thursday, 29 September 2005, 21:00 CDT

By Eric Torbenson, The Dallas Morning News

Sep. 30--Airlines already crumbling under crude oil prices face another eye-popping expense: the record-high cost of turning crude into jet fuel.

Since hurricanes Katrina and Rita idled much of the Gulf of Mexico's refining capacity, most U.S. airlines have been paying an extra premium to refine or "crack" the oil into kerosene-like jet fuel.

In July, before the storms, airlines paid the equivalent of $11 per barrel of crude on top of the spot price to keep planes aloft.

Now the "crack spread" has spiked to nearly $59, meaning it costs nearly as much to refine the jet fuel as it does to buy a barrel of crude. The price of crude rose 44 cents Thursday to $66.79 a barrel.

"We're just in a classic inventory crunch," said David Freyman, vice president of Barnes and Click Inc., a Dallas-based energy consultancy. "At some point, we're possibly going to see some spot outages."

Domestic refineries are geared toward making gasoline and diesel fuel, with jet fuel coming in a distant third. Gulf refineries produce about half the nation's jet fuel; many of the damaged refineries won't restart for days, and it may be several weeks before they reach normal capacity.

"These things can't be turned on like a light switch," Mr. Freyman said.

The spike in refining costs come at the worst possible time for airlines, and the grim outlook for jet fuel was a factor in the bankruptcy filings this month from Northwest Airlines Inc. and Delta Air Lines Inc., both of which were fully exposed to market prices.

While both those airlines tried hard to stay solvent, fuel prices and the hurricane-related price spikes made "time run out on the process," said analyst Ray Neidl of Calyon Securities Inc. in a note to investors. United Airlines Inc., expected to reorganize from bankruptcy next year, "probably needs to further modify its business plan with oil above $65 a barrel," he wrote.

American Airlines Inc. is doing all it can to buy fuel at the lowest prices in different parts of the country away from the Gulf, but is essentially forced to pay the brunt of the higher refinery costs. The Fort Worth-based carrier expects to pay $1.5 billion more this year than last for jet fuel.

Dallas-based Southwest Airlines Co. finds itself in a substantially better position. Not only does Southwest have 85 percent of its jet fuel needs pre-purchased at oil prices equivalent to $26 for this year, but the low-fare carrier also has "hedged" its risk on refining costs for this year as well, said spokesman Ed Stewart. The lingering concern for Southwest remains that its protections will gradually fade in coming years.

The industry's outlook for both crude oil prices and for refining costs isn't pretty. The short-term damage from the Gulf storms isn't completely clear, Mr. Freyman said, but more capacity should return in a few weeks.

Fixing the long-term refinery shortage could take up to five years, according to Vaughn Cordle of AirlineForecasts.

Shares of American parent AMR Corp. fell 17 cents to $10.75. Shares of Southwest fell 4 cents to $14.52.

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NWACQ, DAL, CRARF, ACA, UALAQ, AMR, LUV,

Source: The Dallas Morning News

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