Gas prices reach highs as industry adapts

WASHINGTON -- As the nation heads into the peak summer travel season, the travel industry is abuzz about fuel prices: $41 for a barrel of crude, $2 for a gallon of regular unleaded and $1 for a gallon of jet fuel.

Such record high prices could get in the way of a recovery, but the gathering consensus so far is that consumers want to travel -- and appear willing to pay the price.

The big questions are: For how long will they be willing to do so and for how long will travel companies withstand their rising energy costs?

Airlines

Among travel suppliers, the most vulnerable to fuel price increases are the airlines, which burn 18 billion gallons of jet fuel a year, at a cost that now exceeds $1 a gallon, according to the Air Transport Association (ATA).

By the ATA's reckoning, last week's $40 price for a barrel of crude marks an increase of about $12 over the last 12 months. And each dollar increase in the price of crude means an additional $425 million in fuel costs for the U.S. airline industry.

Airlines learned a lot during previous oil shocks about the importance of using fuel-efficient aircraft, reducing unnecessary weight in galleys and elsewhere, conserving fuel during taxiing and in flight, hedging on prices with futures contracts and other money-saving tactics.

They learned so much that there's not a lot more they can do on the conservation front. And with demand rising, cutting back on capacity is not an attractive option.

Airlines, therefore, are struggling to control other costs and raise fares where and when they can. For competitive reasons, however, the increases don't always stick.

In the latest action, Continental boosted one-way fares $10 in markets for flights under 1,000 miles and $20 for longer hauls. While several major carriers were matching, Continental announced May 24 it was rescinding the fare hike. Just two weeks earlier, American withdrew a similar boost when major competitors declined to match.

The ATA, meanwhile, has turned its attention to government policies regarding the Strategic Petroleum Reserve. The government has been buying crude oil and increasing the stockpile, but the ATA said that when prices are high, as they are now, the government should stop buying and allow the oil to reach the marketplace, where it could add to the available supply and reduce prices by up to 10%. So far, however, the Bush administration is still buying.

Cruise lines

Cruise lines are as dependent on oil as airlines are, but cruise ships typically use a lower grade of fuel to power their diesel engines, and diesel fuel is generally far cheaper than more refined products such as jet fuel and gasoline.

One exception is the newer ships that have gas turbine engines, which use a higher, more expensive grade of fuel and consume more fuel than their diesel counterparts.

Fuel expenses currently account for about 5.5% of revenues at cruise giant Carnival Corp.; last year, fuel was 5.2% of total revenues at Royal Caribbean Cruises Ltd., the second-largest cruise company.

One cruise analyst, Tim Conder with A.G. Edwards, said in a recent research report that fuel is "the most significant cost issue to monitor."

Conder estimated that a $1 change in the price of crude oil translates to approximately two cents per share annually for Carnival Corp. and about three cents per share for RCCL.

Carnival does not hedge its fuel exposure, and RCCL normally hedges 40% to 60% of its annual fuel exposure, Conder said. Neither company, however, has seen the need for a fare hike. As a Carnival spokeswoman put it, "The increased fuel costs are handled as an increased cost of doing business."

Car rental

Car rental firms report that customers are shrugging off record gas prices at the pumps, fueling what could be the best summer season for the industry since 2000, the year business travel began to sputter.

At Hertz, a spokesman said, "So far, gas prices are not having an impact on bookings, which are strong and running well ahead of last year, even factoring out the effect of the Iraq War."

And high gas prices have had little impact on customers' choice of vehicle, with rentals of fuel-thirsty SUVs and minivans on a par with previous years, the car rental companies reported.

"At this point, demand for particular vehicle classes remains unchanged from prior years, reflecting strong summer holiday demand and a noticeable increase in business rentals," the Hertz spokesman said.

According to PriceWaterhouseCoopers, a customer who takes a driving vacation of about 500 miles this summer will pay only $12.50 more for gas compared with last summer, assuming the vehicle gets 20 miles per gallon.

Tour operators

Tour operators are not complaining about rising fuel costs. For some, in fact, rising gas prices could actually boost business.

"Our main competition is the automobile," said Mayflower Tours President John Stachnik. "We know it from our customer surveys. Fifty-seven percent of them say they took their last trip in a car. Fuel crunches always work in our favor."

With 30 or 40 people on a motorcoach divvying up a price increase, the pain is minimal.

John Galvin, chief financial officer of Collette Vacations, agrees.

"[The rising cost of fuel] probably isn't bad for our business," he said. "It makes the case for the affordability of escorted tours that much stronger."

Tour operators are too busy enjoying their best business since 2000 to fret much over things that won't happen until next year. But they know there are concerns over the long term.

"There is a concern about the impact of rising fuel prices on the economy," said Tauck World Discovery's vice president sales and marketing, Scott Supernaw. "But it hasn't appeared to have taken any toll yet. Consumer spending habits haven't changed much."

Tour operators told TravelWeekly.com their motorcoach providers have not yet increased their prices to cover their own cost increases. But they will eventually have to pass on their own additional expenses.

"The motorcoach companies are trying hard to honor their prices," said Mayflower's Stachnik. "They are saying they might be able to hold off raising their prices in '04, but they are warning us that in '05 we'd better be ready."

As for the air fare component of tour prices, "I haven't seen any impact," said Tauck's Supernaw. "Most wholesalers have negotiated contract rates with carriers, so it won't be a concern this year."

Rebecca Tobin, Jorge Sidron and David Cogswell contributed to this report.

To contact reporters Rebecca Tobin, Jorge Sidron or David Cogswell, send e-mail to [email protected], [email protected] or [email protected].

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