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Higher Fuel Prices Take Toll On Airfares, Profits

The turmoil in Africa and the Middle East is driving the price of crude oil up sharply. Prices are higher at the gas pump and for home heating oil. But the biggest increases have been on jet fuel, prompting airlines to raise ticket prices and add hefty surcharges.

Every day, Ike Anand, the director of airline strategy and analysis for Expedia, pores over ticket prices. These days, he's seeing steadily rising fares. Airlines are charging more for many domestic tickets, especially those bought at the last minute by business travelers and others. Airlines are also imposing fuel surcharges on many international flights.

Fewer Low-Priced Seats

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Anand says airlines are also cutting the number of seats available at the lowest price, while increasing the number of higher-priced tickets.

Expedia's number cruncher believes ticket prices would be rising even without the run-up in fuel costs.

"Airlines are raising fares because there is demand and because they can," he says. "Their planes are full." But the escalation in fares probably wouldn't be as steep or as fast without the price hikes in jet fuel, Anand adds.

Pressure On Profits

There's no question higher fuel costs are putting pressure on airline profits.

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"Because our business is so energy dependent, changes in price can have a profound impact on our bottom lines," says John Heimlich, the chief economist for the Air Transport Association. "It's no wonder we have seen a number of carriers try to pass a good part of that through to the final ticket price."

Filling a plane with jet fuel is the largest operating expense airlines have. But figuring how much more an individual airline is now spending on fuel can be difficult.

This week, the market price for a gallon of U.S. Gulf Coast jet fuel was more than $3 a gallon. At this time last year, it was just $2.

Fuel-Hedging Strategies

Most airlines aren't actually paying $3 a gallon because they hedge on fuel prices. Mike Roarke, an analyst with the investment firm McAdams Wright Ragen, says hedging is a form of price insurance. Airlines pay a premium — often a sizable one — for fixing fuel costs at a certain price per barrel.

Airlines have various strategies for hedging: US Airways isn't hedging at all right now, while other airlines have locked in cheaper prices for the rest of the year. But carriers don't hedge on all their fuel needs, and even if they did, it wouldn't totally insulate them from a huge run-up in fuel prices.

Some carriers have already said that because of higher fuel costs they won't be expanding and adding new flights as quickly as they had planned. That probably means so long as passenger demand remains strong, ticket prices are likely to stay up or perhaps climb even higher.

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