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].