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Industry Scrambles to Ease Pump Pain

Operators of planes, trains and trucks look for ways to hedge fuel costs, cut waste or ask customers to pay more.

August 16, 2004|James F. Peltz | Times Staff Writer

As United Parcel Service Inc.'s army of 74,000 domestic drivers make their daily rounds, they share a marching order from headquarters: Shut your engines.

"You will never see a UPS truck idling" at a drop-off point, "even if it's going to be in your driveway for only 30 seconds," spokesman Norman Black said. The driver, he added, "is taught to turn it off."

That's one of several ways the Atlanta-based shipping giant tries to save fuel and corral its soaring energy costs. But they haven't been enough. In the second quarter, Big Brown spent $320 million on fuel -- an increase of $71 million, or 29%, from a year earlier.

Like UPS, companies big and small are struggling to cope with skyrocketing prices for crude oil and its refined products: gasoline, diesel fuel and jet fuel. The situation is especially acute for the fuel-reliant transportation industry.

Gone are the days when Transport Express Inc. in Rancho Dominguez would dispatch some of its 150 trucks only partly filled. With fuel prices so high, "we have to be extremely cautious about how we're matching up our loads," said Vice President Patty Senecal.

Consumers, too, are feeling the pinch of higher pump prices, which leave them with fewer dollars to spend elsewhere. Although average gasoline prices in California and nationwide have fallen from record peaks reached in late May, they remain 30% higher than a year ago, federal surveys show.

Prices are "killing us right now," Billy Aguayo of Echo Park said last week as he pumped gas into his 1989 Chevrolet Suburban at a service station near his home.

Fernando Villamar, manager of a nearby towing service, said stranded motorists sometimes call asking for a free tow. Yet, Villamar said, he has to charge about $40 because the cost of filling up his towing truck leaves little room for profit.

He would like to offer the service at no charge but can't, Villamar said -- not when so much gas money is coming "from my own pocket."

As fuel prices have risen this year, they have created a drag on the U.S. economy. The Federal Reserve Board's policymaking arm, in lifting short-term interest rates last week, said the economy's growth had slowed because of "the substantial rise in energy prices."

The central bank expects stronger expansion ahead. But U.S. industry has a problem right now, with oil for current delivery hitting $46.58 a barrel Friday, a record on the New York Mercantile Exchange.

In after-hours trading Sunday, crude oil futures climbed even higher amid speculation that a referendum in Venezuela on Hugo Chavez's presidency could disrupt oil shipments from that nation. A gunman in Caracas killed one person and injured 12 as they stood in line to vote Sunday on whether to recall Chavez.

The airline industry had hoped that 2004 would be the year it recovered from its post- 9/11 tailspin. Instead, many of the carriers "are just getting crushed" by rising jet fuel costs, said Paul Stebbins, chief executive of World Fuel Services Corp., which helps companies develop fuel strategies.

Fuel accounts for 10% to 15% of an airline's operating costs, second only to labor expenses. And the market price of jet fuel has surged 52% in the last 12 months, to $1.267 a gallon from 83.3 cents.

Several of the large, conventional carriers such as UAL Corp.'s United Airlines and Delta Air Lines Inc. already were in dire financial straits before this year.

"Oil at $46 a barrel is just the added insult to the injury," Stebbins said.

Airlines, truckers and shipping firms try defray the high costs mainly on two fronts: They use financial trading strategies that hedge their fuel expenses and, where possible, slap fuel surcharges on customers' bills.

Hedging effectively enables them to lock in prearranged prices for fuel, so that they are not hurt if prices jump above those levels. For instance, Burlington Northern Santa Fe Corp., one of the major railroads serving California, has more than 50% of its diesel fuel needs hedged through 2005, spokesman Richard Russack said.

Yet even with hedging and extra revenue from surcharges paid by its customers, the Fort Worth-based railroad still expects its third-quarter fuel bill to leap 26% from a year earlier, to $335 million.

Discount carrier Southwest Airlines Co. also hedges extensively, with about 80% of its fuel needs for the next two years locked in at prices below current market levels. But prosperous airlines such as Southwest are better able to hedge than others, because hedging techniques require substantial cash upfront.

Some distressed airlines -- needing the money for other expenses -- have less than half of their fuel requirements hedged, leaving them more vulnerable to the high market prices. Delta has no hedges in place, and in the second quarter its fuel costs soared 54% from a year earlier, to $669 million from $435 million.

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