Airlines' New Motto: We've Got a Fee for That

By Sean Williams
April 25, 2011

Just in case you were worried that airlines were going to have a problem battling rising jet fuel prices, here's news for you that should set your mind at ease: They have a solution.

Apparently, the easiest way to remedy fuel prices that are rising faster than airlines can hedge against is to charge for everything -- and I mean everything!

If you look at the quartet of quarterly results that came out last week, you'll notice a not-so-surprising trend in that airlines that could easily pass along rising costs to customers fared considerably better in their bottom lines than those that could not.

Take JetBlue (Nasdaq: JBLU ) , for example. The low-cost regional carrier usually known for its competitive fares has had no choice recently but to raise flight prices. The company has also responded to fuel costs that rose by 35% in the most recent quarter versus the same quarter last year by tacking on an additional $5 charge to preferred seats with more leg room and for second checked bags. By booking more fees per flights, JetBlue was able to log a $0.01 per-share quarterly profit.

Some of its competitors were not as lucky. Many analysts expected the United Continental (NYSE: UAL ) merger would result in millions of dollars saved as the two companies integrated their fleets and reduced overhead expenses. Instead, the company was eaten alive by merger-related costs and rising fuel expenses. Fuel expenses amounted to 32% of United Continental's quarterly revenue, and even more worrisome the company has just 46% of its fuel hedged through the remainder of the year. In response to rising prices, the company plans to cut its expansion plans altogether.

Even traditional Wall Street darling Southwest Airlines (NYSE: LUV ) isn't immune from the suffering. Despite raising ticket prices and boosting revenue, nearly all of the company's gross profit was gobbled up by rising fuel costs.

Alaska Air Group (NYSE: ALK ) , which also reported quarterly results last week, may come out as the rosiest of the bunch. By carefully hedging most of its fuel costs, the company was actually able to book a derivatives profit! Even excluding those one-time gains, Alaska performed considerably better than expectations thanks in large part to controlled fuel costs and higher passenger load yields.

The lesson here is that an airline can still be successful even in a rapidly rising cost environment if it can pass along costs to customers and keep those customers flying. Alaska Airlines and JetBlue have done an exceptional job of this so far.

Slated to report next week are Delta Air Lines (NYSE: DAL ) and US Airways (NYSE: LCC ) , and let's just say I'm not nearly as optimistic about their outlooks as I was about the smaller regional providers Alaska and JetBlue. Unfortunately, these larger carriers lack the niches of smaller counterparts. This forces them to viciously compete for passengers and drive down profits. We'll see next week whether this dynamic holds.