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Fuel costs drive airlines' surcharges

Rising prices could cost airlines an additional $2.5-billion this year, wiping out gains made by the improving economy and increased traffic.

The beleaguered airline industry is sounding more alarms about rising fuel costs, which are driving yet another wedge in the diverging fortunes of traditional network carriers and their discount rivals.

Continental Airlines this week slapped a $20 to $40 roundtrip fuel surcharge on its fares and warned it may have to cut wages and furlough employees if it can't make the fare increase stick.

Some rival airlines, including Delta, matched the boost in certain markets, although it could still be withdrawn if others don't go along.

Continental said higher fuel prices will add $700-million to its annual costs compared with year-ago projections. That largely wipes out hopes it will break even this year, Continental said.

Wednesday, an airline industry trade group called for the federal government to suspend crude oil shipments to the Strategic Petroleum Reserve until oil prices drop below $30 a barrel, saying the diversions are propping up already high energy costs. The price of crude oil closed at a record high of $41.55 per barrel Monday.

Wednesday's spot market price for U.S. Gulf Coast jet fuel was $1.10 per gallon - about 50 percent above year-ago levels.

"Despite some encouraging estimates that traffic levels are likely to return to pre-9/11 levels this summer, sustained high fuel prices have all but wiped out any chance of a profitable year for the industry as a whole," said James May, president of the Air Transport Association.

Energy analysts estimate crude oil prices will average $37 per barrel this year, compared with $31 last year, boosting the airline industry's annual fuel bill by $2.5-billion, according to the association.

The combination of low fares and costly fuel is likely to widen the financial gap between discount carriers and traditional network airlines, some industry watchers said.

Continental's warning about job cuts "comes far earlier than even we would have expected," J.P Morgan analyst Jamie Baker said Wednesday.

He said Continental's pessimistic assessment indicates the improving economy and rising traffic may not be enough to offset downward pressure on fares from discount carriers, which continue to grow while big rivals flounder.

"The legacy carriers are faced with a pricing structure that they no longer control," said Dave Swierenga, president of AeroEcon, an airline forecasting consultancy in Vienna, Va.

Indeed, Continental's fare hike may be short-lived if not all major carriers match or if some that have get cold feet.

Several efforts by big airlines to raise fares have failed in the past year, while low-cost carriers have been able to push through $2 and $3 fare increases on their smaller networks.

Delta, Continental and most other big network carriers have almost no hedging contracts in place to buffer spikes in fuel prices. Fuel is the second-biggest expense for airlines after labor.

In contrast, AirTran has hedged about half of its fuel needs, while Southwest has hedged 80 percent of its fuel needs at the equivalent of $25 per barrel of crude oil.

ATLANTA - Delta Air Lines announced Wednesday the appointment of a new chief financial officer as well as a shuffling of senior executive responsibilities as the struggling carrier tries to return to profitability. The airline said more changes are expected soon.

Mike Palumbo, 57, who joined the company this month, will be chief financial officer, replacing Michele Burns, who left Delta to become CFO at bankrupt energy supplier Mirant Corp.

The airline has lost more than $3-billion and laid off 16,000 employees in the past three years. It warned recently that it may face bankruptcy if it doesn't get deep wage concessions from pilots.

Other executive changes announced Wednesday:

Joe Kolshak, 47, formerly senior vice president of flight operations, was named chief of operations.

Vicki Escarra, 51, formerly chief marketing officer, has been named chief customer service officer.

Paul Matsen, 44, formerly senior vice president of international and alliances, was named chief marketing officer.

Lee Macenczak, 42, formerly senior vice president of sales and distribution, was named chief human resources officer.

Dan Lewis, 46, will become head of corporate communications, replacing Tom Slocum, who retires June 1.

FORT WORTH, Texas - AMR Corp. chief executive Gerard Arpey added the title of chairman of the American Airlines parent Wednesday at the company's annual meeting of shareholders.

Edward Brennan, who had been chairman since last spring, said the company was in strong enough financial and management shape to combine the titles under one person. Brennan will remain on AMR's board.

Arpey, a longtime American Airlines executive, replaced Donald J. Carty as chief executive last spring after a flap over executive pensions.