You're not the only one wincing at the gas pump these days. If you pump 10 gallons per week into your car and gas goes up 20 cents per gallon, you'll be paying an extra $104 per year for gas. But according to Continental Airlines (NYSE:CAL), the nation's fifth-largest airline, each one-dollar increase in the cost of a barrel of crude oil translates to an expense of $38 million. American Airlines, a division of AMR Corp. (NYSE:AMR) and America's largest airline, has said that each dollar increase costs it $30 million.
It might seem like whining to hear airlines grumble, but consider this: The price of crude oil has nearly doubled in the past few years. It recently sold for more than $38 per barrel, up considerably from the low $20s of just two years ago. Continental spent more than $1.2 billion on fuel last year and expects this year's expense to be much higher. The company forecasts higher fuel costs to wipe out nearly half a billion dollars in operating profit this year, which may put it in the red.
The airline industry is already a tough business, and fuel price volatility makes it even more so. To combat these pressures, some airlines try to lock in low prices when possible, via contracts. Some airlines have also been trying to pass the costs on to passengers, via a "fuel surcharge." Whether an airline succeeds in instituting (or upping) a fuel surcharge usually depends on the reactions of its competitors. Northwest Airlines (NASDAQ:NWAC), the nation's fourth-largest airline, for example, has sometimes been a spoiler, refusing to go along.
But when Continental recently added a $5 fuel surcharge on many of its flights, American Airlines and United Airlines (OTC BB: UALAQ) quickly followed suit, with even Northwest joining in. Some experts say that this price hike is more successful because it's being called a "surcharge" and not merely labeled a fare increase. In addition, many airlines are applying it "selectively," not calling it a blanket increase. This makes it harder for analysts to see exactly how broadly the increase has been applied.
Passengers on discount carriers such as Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU) aren't likely to see any surcharges, though rates may still increase at any point.
If you're a flier, expect to see air fares pressured upward one way or another, as airlines try to stem losses. If you're an investor, these responses to rising fuel costs should be welcome; they'll likely boost bottom lines a bit.
Discuss the airline industry on our Airlines discussion board, which you can try free for 30 days. For stock investing ideas delivered monthly, check out our suite of Fool newsletters.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
