Analysis-Fuel price shock to widen product gap between US airlines

By Rajesh Kumar Singh

RIO DE JANEIRO, June 9 (Reuters) – The fuel shock hitting U.S. airlines is doing more than squeezing margins — it is widening a product gap that may take years to close, as stronger carriers keep investing in lounges, premium seating, technology and international networks that weaker rivals may struggle to match.

At the International Air Transport Association’s (IATA) annual meeting in Rio de Janeiro, executives at financially strong carriers United Airlines, Southwest Airlines and Alaska Air told Reuters a divide was growing between airlines with the ability to keep upgrading their offerings and those forced to conserve cash and slow investment.

The U.S. also has an increasingly K-shaped economy, where higher-income consumers continue to spend freely while price-sensitive travelers pull back. The airlines’ investment in premium offerings is designed to increase their appeal among the high spenders.

“Air travel is not a commodity,” United CEO Scott Kirby said in an interview. “Customers care about the technology, the service, the reliability, the product. They want a great experience. They don’t just want a seat.”

Kirby said United expects to recover the full hit from higher fuel costs through fare increases by year-end, even as he anticipates some pressure on demand. The airline is continuing to invest heavily in aircraft, technology and customer-facing products, supported by a clear earnings advantage, he said.

IATA’s outlook for North America this week forecast a widening gap between resilient network carriers and more constrained low-cost operators.

U.S. budget carrier Spirit Airlines’ collapse last month sharpened scrutiny of carriers with weaker margins and balance sheets as higher fuel costs add to cash pressures.

S&P Global Ratings on Monday cut JetBlue Airways’ credit rating deeper into junk territory, citing higher fuel costs and its heavy debt load.

In an April internal note seen by Reuters, JetBlue CEO Joanna Geraghty said the carrier was not considering bankruptcy, but said fuel prices had made the environment more challenging and that “the decks are stacked against smaller carriers like us,” citing larger rivals’ network, loyalty and credit-card advantages.

United has a deep reciprocal loyalty and network cooperation deal with JetBlue, and Kirby said he did not expect the smaller carrier to seek Chapter 11 protection “any time in the foreseeable future,” citing its cash and unencumbered assets.

JetBlue did not immediately respond to a request for comment. 

INVESTMENT GAP 

Fuel price pressures are shaping which airlines can keep spending on the products passengers are increasingly willing to pay for, such as premium seating and airport lounge access.

Southwest Chief Operating Officer Andrew Watterson said the investment gap was likely to widen as higher borrowing costs become a bigger burden for more indebted competitors, particularly those relying on aircraft sale-and-leaseback deals or fresh debt.

“If you need to borrow money, interest expense is going up,” Watterson said in an interview. “The higher your costs, the lower your growth rate, the lower your investment in products.”

Strong profits and a solid balance sheet, he said, were allowing Southwest to continue investing while some rivals switched into defensive mode. 

Southwest is evaluating products once associated with network carriers — from airport lounges to transoceanic flying and more premium seating — marking a potential shift beyond its traditional low-cost model. Lounges are the furthest along, with some level of decision possible this year, Watterson said.

LOYALTY BUFFER

Alaska Air Chief Financial Officer Shane Tackett said airlines lacking strong loyalty and premium revenue streams were facing the greatest strain after a near-doubling in fuel prices since the start of the Iran war.

“There are some airlines that have a business model that are really challenged in the current environment,” he said.

For Alaska, demand has so far held up. Corporate bookings over the next 90 days were up 20% to 30% from a year earlier across most geographies and industries, Tackett said, while fare increases are expected to offset most of the fuel hit in the second half. Operating cash burn could fall to zero or turn slightly positive if demand holds, he said.

That resilience is giving Alaska room to keep expanding its long-haul and premium ambitions after its acquisition of Hawaiian Airlines. Tackett said the airline plans to modernize Hawaiian’s Airbus A330 cabins by adding fully enclosed suites and international premium economy.

Still, Alaska’s own need to borrow underscores the pressure from higher fuel costs. The airline raised $1 billion earlier this year through $500 million of secured debt and $500 million of unsecured debt, its first unsecured offering. Tackett said the deal was received well by investors and Alaska was not planning to raise more liquidity or roll back capital spending.

He said credit markets were assessing airlines individually, pushing back on concerns that multiple airlines tapping capital markets would automatically raise funding costs across the industry.

“I don’t believe there’s like a credit benefit or a credit expense that is applied to the industry as a whole,” he said in an interview. “It’s really dependent on your profile, your balance sheet, your operating cash flow generation capability.”

(Reporting by Rajesh Kumar Singh; Editing by Jamie Freed)