Tough to fly as oil prices climb
Airlines are buying hedge contracts to guard against fuel price spikes.
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(CNN) -- With jet fuel prices cruising sky-high, the cost of flying those little extras from food to magazines can be too much for an airline to bear.
Many carriers already charge for such extras, which can save a carrier up to $2 million a year.
Other carriers are looking at ways to cut weight or at least charge for it.
Penny-pinching is taking on new urgency as airlines are being eaten alive by soaring fuel bills, which is their second largest outgoing after labor.
Driven by concern over global demand, crude oil prices have tripled since 2001. U.S. crude hit $60 a barrel on the NYMEX exchange last week, and it is still close to that level.
"Energy prices are driving everything right now," Gary Kelly, the CEO of Southwest Airlines told Bloomberg News in a recent interview. "No airline can make money with $50 crude oil prices; now we are up to $60."
For the year to March 2006, British Airways (BA) estimates that fuel costs will be $790 million -- a significant hike from 2005.
Aside from hiking fuel surcharges on tickets, airlines are trying to make savings in ways we do not see -- now when taxiing on the runway aircraft only use one engine.
Some routes have also become shorter. Flying from New York to Hong Kong, airlines used to fly via Alaska over the Bering Sea to Japan and then Hong Kong.
Now they fly through Russian and Chinese airspace, closer to the North Pole, and in a horseshoe route saving up to 3,200 kilometers.
Carriers are also outsourcing maintenance overseas and flying planes longer. This has the U.S. Transportation Department worried about safety, according to the latest U.S. government report.
Flying newer, fuel-efficient planes also contributes to the bottom line -- this is where the younger fleets of the low-cost airlines have an advantage.
Airlines are also purchasing hedge contracts, which is an insurance against fuel price spikes. For instance, BA has 70 percent of its fuel covered at an average cost of $42 a barrel for the remainder of its financial year.
Carriers are also looking to the next generation of airplanes to save costs, such as the Airbus A380 and Boeing 787, which are to be rolled out in the next few years.
"Running an airline has always been tough. Since 1938, the industry has actually lost $14 billion, but these days it is especially hard," John Pincavage, an airline analyst told CNN.
Oil price hikes come at a time when the demand for lower fares is on the rise. No-frills airlines are the ones that are delivering with their young fleets and employees who are prepared to work for less, as well as put in longer hours.
In the U.S., Northwest Airlines spends $15.40 to fly a passenger 100 miles (161 kilometers) -- the cost to low-frills carrier, JetBlue, is only $6.50.
With spiraling fuel costs, running leaner operations helps explain why low-frills carriers are sending older legacy airlines into a financial tailspin.
"Either you are a low-fare airline or you are not. If you are not, then you should try to become one," says Pincavage.
Yet it is hard for some airlines to run more efficiently.
United and U.S. Airways are already operating under bankruptcy protection, while Northwest Airlines are asking employees for $800 million a year in cost savings after they agreed to a $300 million cut last year.
"This whole notion of airlines lingering in bankruptcy -- they should be liquidated and [then] some of the capacity will go away," says Bob Crandall, former chairman of American Airlines.
CNN's Allan Chernoff contributed to this report.
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