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Oil price spikes expected to increase airfares

Spectators look at an Airbus A380 airplane flying above them.

TEXT OF STORY

STEVE CHIOTAKIS: Higher oil prices are likely to punch into airline profits in the coming year. The International Air Transport Association -- the IATA -- said today because jet fuel will cost more the airlines will be making less. About 50 percent less than 2010, which was estimated to be a $16 billion year for the industry.

Seth Kaplan runs Airline Weekly and he's with us from Fort Lauderdale, Florida this morning. Hi Seth.

SETH KAPLAN: Hi. Good morning.

CHIOTAKIS: How is this oil price spike in gas affecting airlines, and consequently, of course the rise in jet fuel?

KAPLAN: Right, well it's been affecting airline the same ways it's affecting all of us when we go to pump gas. They're paying a lot more for what is already their biggest expense. Jet fuel is a lot more expensive now than it was a couple weeks ago. And it's going to eat into their profits to the extent that they can't pass all of that along to consumers.

CHIOTAKIS: Yeah I mean connect the dots a little bit, Seth. I mean it eats in how? I mean they're going to raise prices right on their tickets?

KAPLAN: They will when they can. It's a hyper-competitive industry -- lots of airlines competing for business. And you know, you can -- like any business -- only you can raise your prices if your competitors are doing the same thing. So, they'll try, in some cases they'll succeed. They'll be able to pass some of this along to consumers, but in the end essentially consumers will end up sharing the pain with airlines. The fares will go up somewhat, but not enough to compensate for all of the increase in jet fuel prices and so profits will also go down.

CHIOTAKIS: The profit's down, which is what the IATA said today. The last time, Seth we saw a big increase in fuel costs a few years back, Southwest came out a big winner. The discount airliner. Now they had locked in or hedged their fuel costs before the increase and ended up saving a lot of money. Is there a southwest of today?

KAPLAN: Not exactly. You're absolutely right. Southwest had locked in very low prices. Back about a decade ago, and remember oil at one point in 1998 was trading for $8 a barrel. This time around some airlines, yes, did manage to lock in lower prices recently before we got to these levels, but you know we're talking about prices in the $80, you know rather than having to pay spot prices today up near $100. Nothing like what Southwest had back then. And a few airlines are completely unprotected . U.S. Airways in particular is completely unhedged.

CHIOTAKIS: So the bottom line is tickets go up. Seth Kaplan joining us from Fort Lauderdale. Seth thanks so much.

KAPLAN: Thank you.

About the author

Steve Chiotakis was the host of Marketplace Morning Report until January 2012.
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