Analysis: Transports vulnerable, but impact of oil prices varies

By John Crawley and Karen Jacobs

WASHINGTON/ATLANTA (BestGrowthStock) – Steadily rising oil prices could stall the airline recovery but resurgent automakers are banking that gas prices will jump just enough to stimulate demand for fuel-efficient cars and trucks.

Global package delivery firms are hit in the air and on the ground by fuel price spikes, which can mean more expense for both their shippers and consumers. But FedEx Corp (FDX.N: ), for instance, is insulated to a point by its surcharges.

With energy costs up, transportation companies are adjusting operations following two years of steady prices and a better economy that boosted demand for their services and facilitated healthier financial results, and improved performance on Wall Street.

But crude on Wednesday exceeded $90 per barrel for the first time since October 2008 with cold snaps gripping parts of Asia, Europe and the U.S. Northeast.

The Dow Jones Transport index (.DJT: ) edged up 0.7 percent despite the price jump, but airlines proved to be a drag. The Arca Airline index (.XAL: ) fell 1.2 percent. Automaker shares were mixed with GM up 3 percent on the New York Exchange.

“Clearly that’s a major issue for investors. That is the one concern everybody has … what about higher oil prices?” said Helane Becker, an airline analyst with Dahlman Rose & Co. “Every time oil goes over $90, the stocks sell off as is happening today.”

Airlines and their investors are mindful of the impact high energy costs had in facilitating past bankruptcies. The financial downturn two years ago when oil prices topped $140 is a fresh memory that influences business decisions.

“Airlines have tried to shore up their balance sheets and liquidity, including cash, for a variety of purposes, including a return to $100-barrel-oil,” said John Heimlich, economist for industry trade group, the Air Transport Association.

U.S. carriers are on pace to consume 410 million barrels of jet fuel this year with unit prices $20 higher, industry figures show. That means an $8 billion jump in expenses.

Carriers have become adept at playing defense through mergers, higher fares, more efficient planes, and new bag charges and other fees.

Becker said plans to raise capacity could be scaled back. She and others raised the prospect of higher fares.

“If fuel stays where it is, we should see 7 to 10 percent higher air fares in 2011,” said Tom Parsons, CEO of discount travel site Parsons said fees could rise, too.

AMR Corp’s (AMR.N: ) American Airlines upped fares this month, boosting prices on longer flights up to $10 round-trip


“We have also definitely seen some significant fuel cost increases the last couple months,” AMR spokesman Tim Smith said.

Auto companies are also watching crude changes and the impact on gasoline prices. But their businesses now assume higher prices will spur interest in more fuel-efficient cars and trucks so long as something above the current $3 per gallon does not damage the economy and sap consumer demand.

Industry has been pushed by consumers, overseas competition mainly from Japan and Korea, and the Obama administration, which has imposed new fuel and emission standards.

Carmakers General Motors Co (GM.N: ), Ford Motor Co (F.N: ), and Chrysler Group, a unit of Italy’s Fiat (FIA.MI: ), were rocked when gas topped $4 following Hurricane Katrina in 2005.

Their lifeline to profitable gas guzzlers was cut, beginning a downward spiral that ended with government bailouts and bankruptcy for GM and Chrysler in 2009. Ford leveraged its assets, including its iconic blue oval, to restructure without government aid or Chapter 11 protection.

All three are leaner and more nimble, and have tipped their portfolio to more fuel-efficient product lines, including hybrids and electric cars. Ford has placed a bet on its Fiesta subcompact and abandoned the truck platform for its big selling Explorer sport utility. GM has built the mostly electric Volt and Fiat sees a new car lineup for truck-heavy Chrysler.

“We’re going to keep a close eye on fuel,” said Greg Martin, a GM spokesman, noting the company was in a stronger position if fuel prices influence consumer preferences.

“We have greater flexibility in our manufacturing system and we can shift mixes and models if the market shifts. We don’t have the overcapacity. You have to have the products at the end of the day,” he said.

FedEx has built-in protections against rising jet fuel and diesel prices and has made other changes in the air and on the ground to improve efficiency. For instance, it is switching out less fuel-efficient Boeing Co (BA.N: ) planes for 777 freighters. FedEx is also investing in hybrid and electric trucks for ground delivery operations.

Jess Bunn, FedEx spokesman, said short-term financial performance can be affected by oil price hikes. But he said things usually even out in the long run, so long as the economy does not sag, once fuel surcharges on shippers kick in.

Freight rails and truckers join the rest of the transport sector coping with a steady increase in Jet A (airline) fuel, regular self-service gasoline and diesel.

(Reporting by Karen Jacobs, John Crawley and Detroit newsroom; Editing by Gary Hill)

Analysis: Transports vulnerable, but impact of oil prices varies