Rising fuel prices drive up airline, shipping costs
BLAKE FONTENAY | THE DAILY MEMPHIAN
File this under the category of good news that’s unlikely to get you too excited: The average cost of gasoline in Tennessee went up only about a penny per gallon last week, according to AAA – The Auto Club.
In Memphis, the reported average increase was about three cents per gallon.
While that information probably won’t have drivers turning cartwheels, it does represent a more modest bump in prices after several weeks of sharp increases.
Unfortunately, that doesn’t mean the trendlines are reversing and fuel prices will start dropping soon. Megan Cooper, a spokeswoman for AAA, said prices are likely to continue to climb throughout the summer months.
The statewide average price for a gallon of gas was $2.69 last week. Cooper said it could reach $2.80 by the end of the summer.
“How soon we get there is hard to say,” Cooper said.
While gasoline prices have been going up, so have the prices for diesel and aviation fuel. That impacts many of the transportation, shipping and logistics companies operating in and around Memphis.
Passenger airlines may face one of the toughest challenges. Prices for aviation fuel is climbing even though demand for passenger air travel still lags far behind its pre-pandemic levels.
Memphis International Airport had 121,169 passengers last month, compared to 319,765 in February 2020, before COVID-19 locked the country down.
That mirrors a national trend. Airlines for America, an industry trade group, reported its member airlines have carried 46% fewer passengers than they did before the pandemic. They’ve also been operating 34% fewer flights.
“While U.S. airlines’ passenger volumes are still down 46% from pre-pandemic levels, we have seen an uptick in recent weeks, as well as an uptick in jet fuel prices,” said John Heimlich, the group’s chief economist. “U.S. passenger carriers are continuing to burn an estimated $150 million in cash per day, and higher fuel prices are part of that. Fuel prices also factor into the rates shippers pay for air cargo services.”
George Novak, president and chief executive officer of the National Air Carrier Association, expressed similar concerns.
“Rising aviation fuel prices place an additional burden on an airline industry already reeling from the impact of COVID-19,” Novak said. “The American public is slowly and safely returning to the skies to visit friends and relatives and to enjoy long-delayed vacations as we emerge from this pandemic. Nonetheless, uncertainty about the pace of the recovery remains.”
Novak said if fuel prices continue to climb, passengers eventually will see that reflected in ticket costs.
“Airfares reflect the costs of flying,” Novak said. “Those costs include aircraft, crews, maintenance and fuel. Even among our member carriers, providing the lowest average fares in the industry, rising fuel costs would ultimately raise the price of tickets and could impede a promising recovery in the industry and in the national economy.”
A spokeswoman for Allegiant Airlines, which operates eight daily flights out of Memphis International Airport, said it’s important to keep the recent upward trend in fuel prices in perspective, though.
Hilarie Grey, Allegiant’s managing director of communications, said prices haven’t reached the levels they were at before the pandemic hit.
“Of course the fact that fuel prices were low during the pandemic was helpful during the downturn, but it’s important to look at fuel prices on a relative basis and note that we are still paying less today than in 2019,” Grey said. “Allegiant’s business model is also low frequency, and we regularly adjust capacity seasonally for demand, so should fuel prices become an issue, we are also able to adjust our flying and capacity if needed, in ways that other airlines may not be able to do.”
Fuel costs are also a significant factor for many shipping and logistics companies.
For example, in its most recent quarterly report, FedEx Corp. said it spent $756 million on fuel over the three-month period. That places fuel costs among the top six operating expenses for the company.
A number of factors have been driving fuel costs upward. With gasoline and aviation fuel, increased demand is a factor as the weather warms and people are less fearful of traveling as COVID-19 vaccination rates rise.
Severe winter weather last month also slowed production at some oil refineries in Texas, leading to higher costs.
Typically, shipping and logistics companies deal with fluctuations in fuel costs through surcharges added to customers’ bills.
“It’s been like that for 25 to 30 years,” said Satish Jindel, president of SJ Consulting, which provides information services for the shipping industry.
Those surcharges may be adjusted monthly, weekly or even on a per-load basis. They are typically tied to the per-barrel price of oil, Jindel said.
“People (in shipping businesses) shouldn’t get nervous that this (fuel price increase) will hurt their prices,” Jindel said. “There’s a mechanism for recovering those costs.”
Chrissy Geibel, senior vice president for Dunavant Enterprises, a Memphis-based logistics company, said her company’s fuel surcharges are calculated on a per-mile basis. Since diesel costs have been rising, Geibel said the per-mile surcharge has risen from 31 cents on Jan. 4 to 41 cents on March 22.
While shipping and logistics companies can use fuel surcharges to insulate themselves from higher fuel costs, that doesn’t mean those costs won’t flow through the supply chain and ultimately affect what consumers pay.
A business selling shipped goods might absorb a short-term spike in fuel prices. Over the longer term, it could be a different story.
“Over time, it impacts what an end user pays for goods,” Geibel said.