American, United and Southwest Cut Marginal Routes as Jet Fuel Prices Near Record Highs
Major U.S. airlines are trimming their least profitable routes after jet fuel prices more than doubled year over year, with executives warning of higher fares and fewer flight options ahead.
American Airlines, United Airlines and Southwest Airlines are cutting their least profitable routes as jet fuel prices surge toward record highs, a move that threatens to make bargain airfares even harder to find for American travelers.
Executives from all three carriers said this week that they are rethinking their weakest-performing flights as jet fuel climbs to $4.71 per gallon — more than double the cost a year ago and close to a 20-year high. The comments came at Morgan Stanley's annual Laguna Conference, where airline finance chiefs outlined how rising fuel costs are reshaping their route networks and growth plans.
American Airlines CFO Devon May said the fuel spike has added $1 billion to the company's projected fourth-quarter expenses, prompting the carrier to cut some December flights and plan for slower growth next year. «You're just going to want to pull a little capacity out when we see a rise in fuel like we're seeing right now,» May said at the conference on Sept. 16.
Southwest CFO Tom Doxey said the airline had projected adding 2 to 3 percent to its flight capacity this year but has since cut that projection in half «because fuel has been higher.» A Southwest spokesperson described the schedule adjustments as «very minimal» and said they do not involve large-scale exits from routes or airports.
United CFO Mike Leskinen told analysts that every airline has its «bell curve of profitability,» with some routes earning far more than others. As fuel costs rise, he said, maintaining flights near the bottom of that curve stops making financial sense. «There's some marginal routes that don't make sense in a higher fuel environment, so we cut them,» Leskinen said. «We're flying to maximize profitability and free cash generation, so we'll make those adjustments.»
United will operate fewer flights in December and could make further cuts next year if costs remain elevated. Leskinen noted that 35 percent of United's fourth-quarter tickets were already booked, meaning the airline cannot retroactively raise those prices, but he said there is room to pass higher fuel costs on to consumers eventually. «Jet fuel price gets passed through with a lag,» he said.
All three carriers have raised checked bag fees to help offset costs. United and American declined to share the number of flights they cut.
The reductions are bad news for travelers planning trips to visit family or take vacations. Fewer routes mean fewer flight choices, less convenient departure times and more itineraries requiring a layover instead of a nonstop trip.
The fuel crisis stems from war in Iran, which has choked off global oil supplies and hit jet fuel particularly hard. United and American spent about $8.2 billion and $7.8 billion respectively on fuel in the first six months of this year, both up almost 49 percent from a year earlier, according to their latest filings. Southwest spent nearly $3.6 billion, up about 39 percent.
Consumers are already feeling the squeeze. Fares were 23.4 percent higher in August than a year earlier, compared with a 3.4 percent increase in overall consumer prices, according to the Bureau of Labor Statistics. With airlines now cutting flights, bargain prices could become even scarcer.
The fuel shock has also squeezed carriers across the Atlantic. Europe, which depends more heavily on Middle Eastern oil than the United States, has been hit hard, and Ryanair cut its full-year passenger forecast this month from 216 million to 214 million. CEO Michael O'Leary warned that oil prices could push up the cost of Ryanair's famously cheap European flights.
For now, the three largest U.S. carriers are focused on protecting profitability rather than expanding. The strategy means travelers should expect fewer options and higher prices as the industry waits to see whether fuel costs retreat from their near-record levels.
