Hurricane Katrina Could Give Airlines a Black Eye

After four years of trying to weather all sorts of storms, airlines face the threat that Katrina will create a sustained increase in jet fuel prices they can´t handle. That could accelerate the reshaping of the US airline industry, forcing more carriers to restructure under bankruptcy protection, liquidate or consolidate, industry experts predicted.

The storm´s impact and timing couldn´t have been worse. Katrina will exacerbate existing problems with high jet fuel prices as well as shortages at some airports, just as the airlines head into a seasonally weak time of year. Many airlines already faced potential cash flow problems this fall and winter.

After the storm, fuel prices increased as a nervous market waited to learn the extent of the damage to Gulf Coast oil production and oil refineries. In addition, two petroleum product pipelines that provide the majority of jet fuel to states in the Southeast, Mid-Atlantic and Northeast were not operating due to loss of power at key pump stations in Louisiana and Mississippi.

The ATA said the hurricane reduced the nation´s jet fuel production by 13%, but the FAA downplayed reports that the drop would lead to any immediate widespread disruptions in air service.

The increase in the price of jet fuel has been even steeper than crude oil prices over the past few years. And Gulf Coast jet fuel prices, usually the cheapest for U.S. carriers, soared 22% in the immediate aftermath to nearly $2.30 a gallon.

Jet fuel shortages, which existed at some airports even before the hurricane, will compound airline problems.

Delta, penciled in by industry observers to be a candidate for Chapter 11, may now find it impossible to avoid a bankruptcy filing. Delta has said each $1 increase in the price of crude costs it $62 million a year. For this company and other, experts say, mergers could provide the silver bullets they need so badly.

Mergers, however, have a spotty track record in creating successful airlines and reducing overall capacity, because other airlines or new entrants eventually grab the best of any grounded fleets.

Only one thing is certain: all airlines would benefit from a mild winter, which would help keep jet fuel prices lower by reducing demand for home heating oil. Given their fortunes lately, they shouldn´t count on it.