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Special Report SR-033 RITA Bureau of Transportation Statistics Special Report March 2012 A Decade of Change in Fuel Prices and U.S. Domestic Passenger Aviation Operations By Theresa Firestine and Jenny Guarino Over the past decade, significant events have impacted such as baggage check, reservation changes, and U.S. domestic passenger aviation operations. These food and drink purchases, all of which accounted for a events include, but are not limited to the following: larger portion of total revenue in 2010 than in 2000. • March to November 2001 and December 2007 to June • Carriers reduced capacity on many routes when the 2009 economic recessions; cost of fuel was high. • September 11, 2001 terrorist acts; • Carriers improved the number of available seat miles (ASMs)1 flown per gallon of fuel (fuel productivity) and • Severe Acute Respiratory Syndrome (SARS) outbreak the number of gallons consumed per block hour (fuel in 2002; efficiency).2 This improvement coincides with airlines using newer and more fuel efficient jets. • Airline mergers, including: American with Trans World (TWA) in 2001, US Airways with America West in 2005, Delta with Northwest in 2008, United with Conti- Fuel Cost and Operating Expenses nental in 2010, and Southwest with AirTran in 2011; In June 2011, U.S. air carriers with an annual revenue of $20 million or more paid on average $2.94 per gallon of • Adoption of new technologies such as the Required fuel for scheduled and nonscheduled domestic service—5 Navigation Performance (RNP) flight guidance tech- percent more than what they paid in June 2010 and 51 nology to fly more direct routes and thereby reduce percent more than what they paid in June 2000 after ad- fuel requirements; justing for inflation3 (see figure 1). • Streamlining of operations, including but not limited to The rise in the cost of fuel since 2000 has resulted in fuel the replacement of older aircraft with newer, more fuel becoming one of aviation’s largest operating expenses. efficient aircraft; and In 2000, the cost of labor was 2.5 times that of fuel, but • Upward trend in the cost of fuel. in 2010, the cost of labor and fuel were nearly identical with each accounting for about 25 percent of all operating This report looks at changes in U.S. domestic passenger expenses (see figure 2).4 aviation operations that have occurred during the same time frame as the events listed above, with particular focus on those related to fuel price increases. Major findings include: 1 Available seat miles (ASMs) are airline specific. As such, the number of ASMs • Fuel price increases over the past decade coincided may differ from carrier to carrier even when operating the same aircraft due to with reduced profits and, in many cases, operating carrier specific configurations of seats (e.g., first class options do not exist with all losses among carriers. Operating costs include, but carriers). 2 Block hours are defined as the time elapsed from the moment an aircraft pushes are not limited to, flying operations, maintenance, and back from the departure gate until the moment of engine shutoff at the arrival gate passenger service. following its landing. 3 Fuel cost per gallon adjusted for inflation using the Consumer Price Index (CPI) for • Airfares trended downward despite an upward trend in fuel oil and other fuels, base year 2010 = 275.132. fuel costs. The downward trend in airfares coincided 4 In 2000, airlines paid $14.1 billion for fuel and $34.5 billion for labor. On average, airlines paid $3.5 billion for fuel and $8.6 billion for labor in a quarter. In the third with increased decoupling of airfares with services, quarter of 2010, airlines paid $8.4 billion for fuel and $8.2 billion for labor. BTS Special Report Figure 1: Cost of Fuel for Scheduled and Figure 2: Most Costly Operating Expenses – 2000 to Nonscheduled Domestic Operations – 2000 to 2011 Q3 2010 (Monthly data for scheduled and nonscheduled domestic (Data are quarterly) operations by U.S. carriers with annual revenue of $20 million Cents per available seat mile or more) 14 Fuel cost per gallon Transport-related 4.0 3.0 12 Rents and ownership 3.5 2.5 Labor 10 3.0 s Fuel 2010 dollars 2.0 2.5 8 Dollars 2.0 1.5 Unadjusted dollars 6 1.5 1.0 Inflation adjusted dollar 1.0 4 0.5 0.5 2 0 0 1 1 1 1 1 1 1 2000. 2001. 2002. 2003. 2004.1 2005.1 2006.1 2007.1 2008. 2009. 2010.1 2011. 0 Year. month 1 1 1 1 1 1 1 1 1 1 1 NOTE: Fuel cost per gallon adjusted for inflation using the Consumer Price Index 2000. 2001. 2002. 2003. 2004. 2005. 2006. 2007. 2008. 2009. 2010. (CPI) for fuel oil and other fuels, base year 2010 = 275.132. Year. quarter SOURCE: U.S. Department of Transportation, Research and Innovative Technology NOTE: Most costly = any item accounting for 10 percent or more of total operating Administration, Bureau of Transportation Statistics, Form 41 Financial Data Schedule expenses in Q3 2010. Fuel = cost of aviation fuel used in flight operations, exclud- P12a (fuel data) as of Aug. 25, 2011. ing taxes, transportation, storage, and fueling expenses. Labor = wages, employee benefits (e.g., annuity payments, educational, medical, recreational, and retirement programs) and payroll taxes (e.g., FICA, State and Federal unemployment insur- ance) paid to or on behalf of general management, flight personnel, maintenance Profit/Loss labor, and aircraft and traffic handling personnel. Rents and ownership = the cost of aircraft rentals; depreciation and amortization of flight equipment, including airframes Over the past decade, real fuel prices have trended upward and parts, aircraft engine and parts, capital leases and other flight equipment; airport terminal rents, hangars, ground service and support equipment (GSE), storage and after remaining relatively stable throughout the 1990s. distribution equipment, and communication and meteorological equipment. Transport- The following sections of this report examine changes in related = expenses incurred for providing air transportation facilities associated with the performance of service that emanate from and are incidental to air transportation domestic passenger aviation operations concurrent with services performed by the carrier, including expenses related to regional jet contract real fuel prices using selected legacy and low cost carriers.5 agreements. Legacy carriers, in this report, refer to the five U.S. airlines SOURCE: ATA Quarterly Cost Index: U.S. Passenger Airlines, http://www.airlines.org/ with the most enplanements in 2010 that were established Economics/DataAnalysis/Pages/QuarterlyCostIndex.aspx as of April 2011. before airline deregulation in 1978 (American6, Continental, Delta7, United, and US Airways8). Low cost carriers refer to all previous levels (see figure 3 and 4). During the first the five U.S. airlines with the most enplanements in 2010 through the fourth quarter of 2008, legacy carriers posted that utilize a business model emphasizing high aircraft an operating loss of $6.4 billion; low cost carriers posted an utilization with relatively streamlined passenger and aircraft operating profit of $0.40 million. operations (JetBlue, Frontier, AirTran, Spirit, and South- west). During 2008, the difference in profits between low cost and legacy carriers can be associated with substantial differenc- Both legacy and low cost carriers have experienced es in the average price of fuel purchased by the two carrier declines in operating profits since the mid 1990s. Unlike groups. The average cost among low cost carriers peaked low cost carriers, legacy carriers experienced substantial at a lower price than it did among legacy carriers. This was losses immediately after 9/11 and from the first through the partially a result of individual airline fuel purchasing strate- fourth quarter of 2008 when the real fuel price rose beyond gies. Low cost carriers, particularly Southwest, anticipating that the cost of fuel would go up and not down, locked in 5 By U.S. definition, a legacy carrier is an airline carrier, with the exception of low cost the price of fuel (termed hedging) for a large portion of the Southwest Airlines, that established airline routes prior to the Airline Deregulation Act fuel they consumed and thereby avoided price increases of 1978. Carriers in the United States that formed after the Airline Deregulation Act plus Southwest Airlines, established in 1967, are generally considered to be low cost by guaranteeing fuel in bulk at a lower price. Legacy carri- carriers. ers engaged in a similar practice but to a lesser extent. The 6 American Airlines merged with Trans World Airlines (TWA) in 2001. American effect of hedging can be seen in the following: Airlines and TWA data are combined and referred to as American. 7 Delta merged with Northwest in 2008. In this report, Delta and Northwest data are combined and referred to as Delta. • lower real price of fuel paid by low cost carriers in 8 US Airways merged with America West in 2005. In this report, US Airways and nearly all quarters over the past decade, America West data are combined and referred to as US Airways. 2 BTS Special Report Figure 3: Average Operating Profit/Loss Among Figure 4: Average Operating Profit/Loss Among Legacy Carriers (2010 dollars) – 1991 to Q4 2010 Low Cost Carriers (2010 dollars) – 1991 to Q4 2010 (Data are yearly from 1991-1999 and quarterly from Q1 2000, (Data are yearly from 1991-1999 and quarterly from Q1 2000, adjusted for inflation) adjusted for inflation) 0.07 3.0 3.0 In 0.07 Average fuel cost per gallon In flation-adjusted average cost of fuel per gallon (legacy carriers) flation-adjusted average cost of fuel per gallon 0.04 0.04 2.5 Low cost carrier profit/loss 2.5 0.01 0.01 2.0 2.0 -0.02 -0.02 1.5 1.5 -0.05 Average fuel cost per gallon (low cost carriers) -0.05 1.0 -0.08 Legacy carrier profit/loss 1.0 -0.08 erage profit/ loss per available seat mile -0.11 0.5 erage profit/ loss per available seat mile 0.5 Av -0.11 Av -0.14 0 -0.14 0 4 4 4 4 4 4 4 4 4 1991 1995 1999 4 4 4 4 4 4 4 4 2000.
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