A Decade of Change in Fuel Prices and U.S. Domestic Passenger Aviation Operations

By Theresa Firestine and Jenny Guarino

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Over the past decade, significant events have impacted U.S. domestic passenger aviation operations. These events include, but are not limited to the following:

• March to November 2001 and December 2007 to June 2009 economic recessions;
• September 11, 2001 terrorist acts;
• Severe Acute Respiratory Syndrome (SARS) outbreak in 2002;
• Airline mergers, including: American with Trans World (TWA) in 2001, US Airways with America West in 2005, Delta with Northwest in 2008, United with Continental in 2010, and Southwest with AirTran in 2011;
• Adoption of new technologies such as the Required Navigation Performance (RNP) flight guidance technology to fly more direct routes and thereby reduce fuel requirements;
• Streamlining of operations, including but not limited to the replacement of older aircraft with newer, more fuel efficient aircraft; and
• Upward trend in the cost of fuel.

This report looks at changes in U.S. domestic passenger 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:

• Fuel price increases over the past decade coincided with reduced profits and, in many cases, operating losses among carriers. Operating costs include, but are not limited to, flying operations, maintenance, and passenger service.
• Airfares trended downward despite an upward trend in fuel costs. The downward trend in airfares coincided with increased decoupling of airfares with services, such as baggage check, reservation changes, and food and drink purchases, all of which accounted for a larger portion of total revenue in 2010 than in 2000.
• Carriers reduced capacity on many routes when the cost of fuel was high.
• Carriers improved the number of available seat miles (ASMs)^[1] flown per gallon of fuel (fuel productivity) and the number of gallons consumed per block hour (fuel efficiency).^[2]  This improvement coincides with airlines using newer and more fuel efficient jets.

Fuel Cost and Operating Expenses

In June 2011, U.S. air carriers with an annual revenue of $20 million or more paid on average $2.94 per gallon of fuel for scheduled and nonscheduled domestic service—5 percent more than what they paid in June 2010 and 51 percent more than what they paid in June 2000 after adjusting for inflation^[3] (see figure 1).

The rise in the cost of fuel since 2000 has resulted in fuel becoming one of aviation’s largest operating expenses. In 2000, the cost of labor was 2.5 times that of fuel, but in 2010, the cost of labor and fuel were nearly identical with each accounting for about 25 percent of all operating expenses (see figure 2).^[4]

Profit/Loss

Over the past decade, real fuel prices have trended upward after remaining relatively stable throughout the 1990s. The following sections of this report examine changes in domestic passenger aviation operations concurrent with real fuel prices using selected legacy and low cost carriers.^[5] Legacy carriers, in this report, refer to the five U.S. airlines with the most enplanements in 2010 that were established before airline deregulation in 1978 (American^[6], Continental, Delta^[7], United, and US Airways^[8]). Low cost carriers refer to the five U.S. airlines with the most enplanements in 2010 that utilize a business model emphasizing high aircraft utilization with relatively streamlined passenger and aircraft operations (JetBlue, Frontier, AirTran, Spirit, and Southwest).

Both legacy and low cost carriers have experienced declines in operating profits since the mid 1990s. Unlike low cost carriers, legacy carriers experienced substantial losses immediately after 9/11 and from the first through the fourth quarter of 2008 when the real fuel price rose beyond all previous levels (see figure 3 and 4). During the first through the fourth quarter of 2008, legacy carriers posted an operating loss of $6.4 billion; low cost carriers posted an operating profit of $0.40 million. 

During 2008, the difference in profits between low cost and legacy carriers can be associated with substantial differences in the average price of fuel purchased by the two carrier groups. The  average cost among low cost carriers peaked at a lower price than it did among legacy carriers. This was partially a result of individual airline fuel purchasing strategies. Low cost carriers, particularly Southwest, anticipating that the cost of fuel would go up and not down, locked in the price of fuel (termed hedging) for a large portion of the fuel they consumed and thereby avoided  price increases by guaranteeing fuel in bulk at a lower price. Legacy carriers engaged in a similar practice but to a lesser extent. The effect of hedging can be seen in the following:

• lower real price of fuel paid by low cost carriers in nearly all quarters over the past decade,
• relatively moderate rise of fuel prices paid by low cost carriers in 2008, and
• lack of a relationship between the cost of fuel and profits among low cost carriers.

Both carrier groups reduced hedging practices beginning in 2008, when the tactic faltered as the price of fuel dramatically rose and then dropped to an amount less than that locked in by most carriers.^[9] In the first quarter of 2011, United hedged roughly 63 percent of its fuel needs, American and Delta roughly half, and Southwest approximately 64 percent (down from more than 70 percent in mid 2008^[10]); US Airways has not engaged in hedging since August 2008.^[11] As hedging lessened, the real price of fuel paid by low cost carriers approached that of legacy carriers in 2010.

Raising Revenue

Historically, airlines have passed along increased costs to consumers by raising airfares; consequently, airfares have tended to rise and fall with the price of fuel. Figures 5 and 6 show the relationship between airfare and fuel prices (adjusted to 2010 dollars) for both legacy and low cost carriers, respectively. For both airline groups, the average airfare price has trended downward and appears to be related inversely to fuel costs in a few quarters. For example, when fuel costs reached their highest level (since 2000) in the third quarter of 2008, airfares declined through the fourth quarter of 2008. Since then, airfares have continued to rise and fall with fuel prices, yet airfares have trended downward while fuel prices have trended upwards.

The downward trend in airfares also coincides with increased decoupling of ticket prices with air services, such as baggage check, reservation changes, and food and drink purchases. In the first quarter of 2000, legacy and low cost carriers raised a majority of their revenue from passenger airfares (88 and 95 percent respectively). Reservation fees, baggage fees, and other transport revenue accounted for 7 percent of legacy carriers’ total revenue and less than 1 percent of low cost carriers’ total revenue. By the fourth quarter of 2010, both legacy and low cost carriers collected a larger portion of their total revenue from ancillary fees (27 and 4 percent respectively) and a smaller percent from passenger airfares (69 and 90 percent respectively).^[12]

Changes in Airline Operations

Rising fuel costs can coincide with changes in airline operations. These changes include reductions in capacity and in the fuel burned by aircraft.

Changes in Capacity

The relationship between the cost of fuel and airline capacity, as measured by available seat miles (ASMs), can be seen in figure 7, which shows the cost of fuel per gallon and domestic passenger capacity on routes operated by both legacy and low cost carriers. ASMs are a commonly used measure of airline capacity and are defined as the number of available seats multiplied by miles flown. This metric measures capacity changes resulting from both adjustments in flight schedules and the size of the aircraft used on a flight segment. A reduction in the number of flights and/or the substitution of smaller aircraft reduces capacity as measured in ASMs.

Both legacy and low cost carriers reduced capacity in recent years (see figure 7). Legacy carriers began reducing capacity in the face of post-9/11 challenges and competition from expanding low cost carriers. These capacity reductions accelerated after fuel prices began to rise in 2008. Low cost airlines expanded capacity during the early years of the decade. Reductions occurred during the 2008 rise in fuel prices and while expansions have since occurred, capacity has not returned to the pre-2008 level.

Changes in Fuel Burn

Airline productivity and efficiency has changed over the past decade. Productivity most commonly is measured by the number of ASMs per gallon of fuel consumed (ASM/g) and fuel efficiency by the number of gallons consumed per block hour.^[13] The productivity and efficiency of a particular aircraft varies from one flight to another because of differences in distance, payload, weather, cruising speed, altitude, and other factors. For example, shorter flights spend a greater percentage of flight time climbing and descending.

As seen in figure 8, productivity improvements achieved by legacy carriers have coincided with rising fuel prices. On average, productivity has risen 14.5 percent from the first quarter of 2000 to the fourth quarter of 2010, from 55.4 to 64.8 ASM/g. Of the legacy carriers examined, Continental reported the highest productivity in 2010 and increased its productivity the most, with about a 21 percent increase.^[14]

The overall productivity of the low cost carriers appears to have been equally impacted (see figure 9). On average, low cost carrier ASM/g increased from 57.8 in the first quarter of 2000 to 68.9 in the fourth quarter of 2010, an increase of 11.1 ASM/g (or 16.0 percent).^[15] JetBlue maintained its high productivity while AirTran, Southwest, and Spirit reported a large increase that brought their productivity number closer to that of JetBlue.

Average aircraft age also affects carrier efficiency. The marginally greater improvement in ASM/g among legacy carriers follows, in part, from the carriers’ greater need to replace older aircraft. In 2009, the legacy carriers’ fleet was twice as old as those of the low cost carriers (see figure 10). Low cost carriers have newer aircraft than legacy carriers as all low cost airlines, with the exception of Southwest, began operation in the mid to the late 1990s. Omitting Southwest, the average age of aircraft flown by the low cost carriers is 5.9 years compared to 13.8 years for legacy carriers.

The number of gallons of fuel consumed during aircraft operation (measured in terms of block hours) also can be used to examine changes in fuel burn. Table 2 shows the change in the number of gallons of fuel consumed per block hour from the fourth quarter of 2000 to the fourth quarter 2010 (the most recent data point). In table 2, it can be seen that:

• All low cost carriers, with the exception of Frontier (which reported significantly below average fuel consumption in the fourth quarter of 2010), required fewer gallons of fuel per block hour in 2010.
• Spirit demonstrated the greatest improvement, requiring 14 percent less fuel per block hour. The improvement was due, in part, to Spirit replacing its McDonnell Douglas DC-9 aircraft with more fuel efficient aircraft.^[16]
• With the exception of Delta, improvements in efficiency among legacy carriers were small or nonexistent.  In 2010, Delta used 7 percent fewer gallons per block hour than in 2000. Delta’s improvement resulted partially from the airline abandoning large passenger jets (three or more engines) in favor of smaller, more fuel efficient aircraft.^[17]

The changes in productivity and efficiency reflect changes in carrier fleets. As noted above, carriers have turned away from using three- to six-engine jets for domestic flights and toward using two-engine passenger jets. The two-engine jets, such as the Airbus Industrie A321, require less fuel than aircraft with more engines, such as the Boeing 747 (four engine) and the McDonnell Douglas MD-11 (three engine) (see figure 11 and table 3). In 2000, 65.2 billion ASMs (10.4 percent of domestic ASMs) were offered on three-engine passenger jets making a scheduled domestic flight; by 2010, ASMs on these same aircraft fell to zero as three-engine jets were phased out from use for domestic flights. ASMs on four- and six-engine passenger jets also declined, dropping from 5.6 billion ASMs (0.89 percent) in 2000 to 505.4 million ASMs (0.09 percent) in 2010.

Data on the operational fuel economy of the above jets are available for all flight segments (scheduled and nonscheduled) provided by the selected carriers originating or ending at a U.S. location. Scheduled and nonscheduled flights operating with three, four, and six-engine passenger jets achieved lower operational fuel productivity in 2010 than two-engine passenger jets (after achieving nearly the same fuel productivity in 2000) and required significantly more gallons of fuel per block hour (see table 4) in both 2000 and 2010. For an hour flight in 2000, two-engine passenger jets required an average of 1,001 gallons of fuel while three-engine passenger jets required 1,755 gallons and four- and six-engine passenger jets required 3,469 gallons. The gallons required per block hour by each aircraft improved between 2000 and 2010.

The higher fuel requirements of three, four, and six-engine jets result from the inefficiency of their greater number of engines. Per seat mile, the difference may be less as jets with a larger number of engines typically provide more capacity. Year to year, jets will achieve different levels of efficiency and productivity due to variations in the way carriers operate them and in the segments on which they are flown (see table 4).

The above fuel productivity and efficiency averages by number of engines mask significant variation within the engine groups. Table 5 shows this variation for selected two-engine passenger aircraft operated by U.S. carriers in 2010. As shown in the table:

• Low cost carriers achieved the highest level of productivity on the Airbus Industrie A321 at 131.3 ASM/g in 2010. The aircraft was operated only by Spirit. Legacy carriers achieved a lower level of productivity on the same aircraft and a higher level on the Boeing 737-900, which was operated by Continental alone.
• Low cost carriers achieved the best fuel efficiency on the aircraft on which they achieved the best productivity—the Airbus Industrie A321. Legacy carriers achieved the best fuel efficiency on a different aircraft—the Boeing 737-300 (operated, among legacy carriers, by Continental and US Airways). In 2010, the Airbus Industrie A321 required 635 gallons of fuel per block hour and the Boeing 737-300 required 750 gallons of fuel per block hour—115 more gallons of fuel on a 1 hour flight despite it being a somewhat smaller aircraft than the Boeing jet.

The operational differences in productivity across two-engine aircraft generally result from physical variation in the aircraft themselves (e.g., capacity and the weight of the aircraft and its components, such as service carts, body modifications to improve aerodynamics, etc.) and from operational variation, including but not limited to carrier adoption of efficiency improving technologies (e.g., navigation systems); carrier maintenance schedules; and average flight segment distance, time, and weather conditions.^[18]

The effect of carrier specific factors on aircraft fuel productivity can be seen in tables 6 and 7. Tables 6 and 7 show that not all major legacy and low cost U.S. carriers operate the aircraft shown in table 5 and not all achieve the same ASM/g. In 2010, 2 of the 10 major carriers (US Airways and Spirit) operated the Airbus A321, a high productivity aircraft. The highest productivity (88 ASM/g) of any of the carriers was noted on Delta’s Boeing 757-300, an aircraft that averaged a lower productivity than the Airbus A321 when considering the carriers in each group.

The different fuel productivity of the same aircraft across carriers reflects a variety of operational differences, including but not limited to stage length, payload factor, weather conditions on the segments flown, fuel saving technologies adopted, and aircraft retrofits. For example, a few carriers, such as Southwest, have begun to use Required Navigation Performance (RNP) flight guidance technology to fly more direct routes and thereby reduce fuel requirements.^[19] The adoption of such technologies has coincided with recent increases in the cost of fuel.

Net Impacts

Fuel price increases have coincided with rising ancillary fees and changes in airline operations, including but not limited to reductions in capacity and increases in fuel productivity and efficiency. Such changes already have been noted with the rise of fuel prices in 2011^[20] and are predicted to persist in 2012. Morgan Stanley, prior to American filing for bankruptcy, estimated available seat miles from Alaska, American, Delta, United, and US Airways would decline by 0.6 percent in 2012. Conversely, Frontier, Jet Blue, and Southwest are predicted to increase capacity, although by less than 1 percent following a 5 percent growth in 2011.^[21]

^[1] Available seat miles (ASMs) are airline specific.  As such, the number of ASMs may differ from carrier to carrier even when operating the same aircraft due to carrier specific configurations of seats (e.g., first class options do not exist with all carriers).

^[2] Block hours are defined as the time elapsed from the moment an aircraft pushes back from the departure gate until the moment of engine shutoff at the arrival gate following its landing.

^[3] Fuel cost per gallon adjusted for inflation using the Consumer Price Index (CPI) for fuel oil and other fuels, base year 2010 = 275.132.

^[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 quarter of 2010, airlines paid $8.4 billion for fuel and $8.2 billion for labor.

^[5] By U.S. definition, a legacy carrier is an airline carrier, with the exception of low cost Southwest Airlines, that established airline routes prior to the Airline Deregulation Act 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 carriers.

^[6] American Airlines merged with Trans World Airlines (TWA) in 2001. American 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.

^[8] US Airways merged with America West in 2005. In this report, US Airways and America West data are combined and referred to as US Airways.

^[9] Allen McAllister. “U.S. airlines more cautious on ‘10 fuel hedges,” Feb. 25, 2010. Retrieved June 7, 2011 from: http://www.reuters.com/article/2010/02/25/us-travel-leisure-summit-fuel-hedging-idUSTRE61O59Z20100225

^[10] Peter Pae. “Hedge on fuel prices pays off,” May 30, 2008. Retrieved June 7, 2011 from: http://articles.latimes.com/2008/may/30/business/fi-southwest30

^[11] Brett Snyder. “Fuel hedging no guarantee for airlines,” Mar. 21, 2011. Retrieved June 7, 2011 from: http://articles.cnn.com/2011-03-21/travel/airlines.fuel.hedging_1_oil-prices-increases-airlines-lower-price?_s=PM:TRAVEL

^[12] U.S. Department of Transportation, Research and Innovative Technology Administration, Bureau of Transportation Statistics, Form 41 Financial Data P1.2 as of July 6, 2011.

^[13]  Block hours are defined as the elapsed time from the moment an aircraft pushes back from the departure gate until the moment of engine shutoff at the arrival gate following its landing.

^[14] Observations with available seat miles per gallon in the top 1 percent or bottom 1 percent of all values (in Q1 2000 through Q3 2010) are excluded from these statistics as they are suspected outliers. Data from: U.S. Department of Transportation, Research and Innovative Technology Administration, Bureau of Transportation Statistics, Form 41 Traffic Data T2 (U.S. carriers) as of July 11, 2011.

^[15] ASMs per gallon for Frontier Airlines is excluded from the average for both 2000 and 2010 because  data reported by Frontier for the fourth quarter of 2010 appears to be misreported as it is notably lower than in all other quarters (see figure 4).

^[16] Spirit first began scheduled domestic operations using the McDonnell Douglas DC-9-30 in 1992. From 1992-1997, 99.9 percent or more of scheduled domestic ASMs were provided on this aircraft. ASMs on the McDonnell Douglas DC-9-30 gradually declined and by 2004, this aircraft was no longer used for scheduled domestic flights. In 2010, 11.7 percent of all scheduled domestic ASMs were offered on the Airbus Industries A320, 78.7 percent on the Airbus Industries A319, and 9.6 percent on the Airbus Industries A321. (SOURCE: U.S. Department of Transportation, Research and Innovative Technology Administration, Bureau of Transportation Statistics, Form 41 Traffic Data T100 Domestic Data as of April 29, 2011)

^[17] In 2000, 22 percent of Delta’s ASMs were on aircraft with three or more engines compared to 0.02 percent in 2010 (Source: U.S. Department of Transportation, Research and Innovative Technology Administration, Bureau of Transportation Statistics, Form 41 Traffic Data T100 Domestic Segment (U.S. Carriers) as of July 6, 2011). 

^[18] See Mayerowitz, Scott. “Airlines positioned for big gains in efficiency,” Miami Herald, July 4, 2011. Retrieved July 11, 2011 from: http://www.miamiherald.com/2011/07/04/2298876/airlines-positioned-for-big-gains.html

^[19] See: “Southwest Airlines’ Pilots Begin Flying Required Navigation Performance Efficient Procedures at 11 Airports,” Jan. 11, 2011. Retrieved July 11, 2011 from: http://www.prnewswire.com/news-releases/southwest-airlines-pilots-begin-flying-required-navigation-performance-efficient-procedures-at-11-airports-113275099.html

^[20]  Industry analysts have estimated that if the cost of fuel rises to and carriers purchase fuel at an average of $3.00 per gallon in 2011, U.S. airlines face an estimated $15 billion increase in their fuel bill (as compared to 2010). See: John Heimlich. “The Price of Jet Fuel and Its Impact on U.S. Airlines,” Mar. 29, 2011. Retrieved Apr. 26, 2011 from: http://www.airlines.org/News/Letters/Pages/Oped_03-09-2011.aspx

^[21] Jay Boehmer. “Analysts Project Lower 2012 U.S. Carrier Capacity,” Business Travel News, Dec. 7, 2011. Retrieved Jan. 5, 2012 from: http://www.businesstravelnews.com/Business-Travel/Analysts-Project-Lower-2012-U-S--Carrier-Capacity/?ida=Airlines&a=mgmt