Oil price record comes at worst time for airlines
Record-high oil prices will likely have a varied impact on the economy as the gains lead to higher prices for gasoline, jet fuel and other energy products. Here is a look at how they may affect a few key sectors:
- Airlines. For the nation's airlines, the new record oil price probably portends record prices for jet fuel, which this year surpassed labor as the industry's No. 1 expense. Every dollar increase in the price of a barrel of crude oil translates into about $470 million a year in additional jet fuel costs for U.S. airlines as a whole.
This oil price spike comes at the "worst possible time" for carriers, says John Heimlich, chief economist for the Air Transport Association. The fourth quarter is traditionally slow except for the Thanksgiving and Christmas holidays. The first quarter is traditionally the weakest of the year.
Although Heimlich is still predicting the industry will generate $5 billion in profits this calendar year, he says none of the airlines has budgeted for fuel at this price level. If these prices linger into 2008, airlines will be forced to reduce flights, especially on less-profitable routes, he says.
- Retailers. Retail analysts were already predicting a lackluster holiday season, given the slowing economy. Consulting firm TNS Retail Forward last month predicted holiday sales will grow at the slowest pace in five years this season, as consumers feel the pinch of a credit crunch and slowing housing market.
TNS Retail Forward chief economist Frank Badillo says consumers are still spending a smaller fraction of their income on gasoline today than in 1981, which will cushion the blow a bit.
But he adds that high gasoline prices are intensifying a growing split between well-off shoppers and less-affluent consumers, who are more likely to feel the pinch of rising gasoline prices.
"High fuel prices are impacting consumers. We see that particularly on the lower end," says Jeff Noddle, CEO of Eden Prairie, Minn.-based Supervalu, which owns 2,500 grocery stores nationwide under a variety names, including Albertsons, Jewel and Save-A-Lot.
Lower-income consumers are more likely to cut back on meals out as gas prices rise, says Hudson Riehle of the National Restaurant Association. Still, restaurant sales growth is poised to set another record this year, even as gasoline prices have spiked, he says.
- Autos. High oil prices often result in a lot of consumer interest in more fuel-efficient cars. But that interest doesn't always mean a massive change in buying patterns, says Phil Reed, senior consumer advice editor for Edmunds.com.
"It doesn't always change sales as much as you would think," he says. People tend to feel small, fuel-efficient cars are unsafe, Reed says, so they continue buying larger vehicles.
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