Airlines say they can't afford another huge oil price jump

The 25% run-up in oil prices over the past month that has motorists again scrutinizing gas station price signs heading into the Memorial Day weekend also has U.S. airline managers beginning to worry about another big cost jump on top of double-digit drops in demand and revenue.

The CEOs of both AMR, parent of American Airlines, amr and rival Southwest Airlinesluv said Wednesday that market fundamentals — including a glut of crude oil on the world market — don't support prices as high as $62 a barrel, a six-month high. But both American's Gerard Arpey and Southwest's Gary Kelly conceded that energy prices right now aren't being driven by market fundamentals.

"I don't understand why oil went to $150 a barrel last year," Arpey said at a news conference following AMR's annual shareholders meeting in Fort Worth. "And I can't imagine in a global recession the circumstances that would drive oil back to those levels again."

Kelly, at a separate news conference after Southwest's annual meeting in Dallas, said the unusually large supply of oil in the world currently — the result of a 7.6% drop in global demand from this time a year ago — points to investors "looking to commodities as an inflation hedge."

Both executives made it clear that airlines can't stand another run-up to $147 a barrel, where oil peaked last July before plummeting fast to a low around $33 a barrel in February. All of the USA's big carriers began cutting capacity after Labor Day last year in response to high jet fuel prices that at times went above $4 a gallon.

Even Southwest, which grew at a rate near or above 10% a year from the early 1990s through 2007, will reduce capacity about 4% this year despite adding service to Boston's Logan Airport, New York's LaGuardia Airport (beginning in June), and Milwaukee (this fall).

The big drop in fuel costs since last summer seemingly negated the need for those capacity cutbacks. But those cuts turned out to be timely and helpful because of the unexpected fall in demand and revenue. "If oil were to make another run like it did a year ago, it would have profoundly negative implications not just for our company but for the whole airline industry," Arpey said.

That's why carriers are venturing back into the oil hedging markets to help smooth out oil price volatility in the event of a dramatic price jump.

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