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Alaska Air: Fuel surge puts earnings at risk as it holds fares

Alaska Air Group announced on Tuesday that strong travel demand, higher fares and a sharp rise in fuel prices are helping to offset the?rise. The airline also lowered its outlook for the full year and warned about a severe hit to earnings during the second quarter.

The surge in jet-fuel prices after the Iran War is the first real stress test for the airline industry since the pandemic. Profits are squeezed even though demand remains steady. The airlines sell their seats in advance, and can't raise the price quickly. This leaves them "exposed" when fuel prices rise.

Alaska Airlines said that bookings were stable despite steep fare increases. In recent weeks, Alaska's core U.S. markets have seen a 20% increase in fares compared to a year earlier. This could support strong revenue growth in the second quarter if current trends continue.

Benito Minicucci, Chief Executive of the company, said that a strong demand background and a stable fare increase offset some of this pressure.

However, the cost increases are not fully covered by higher fares. Alaska Airlines said that it has recovered 'about one-third' of the increase in fuel costs. This gap is expected to affect earnings for the second quarter.

FUEL SURGE CLOUDS FOREWARD

Fuel prices are also becoming more unpredictable. The airline reported that prices had fluctuated between $4.45 and 5.15 per gallon over the last week, making it difficult to plan. It also prompted it to withdraw its full-year forecast.

Refining margins has exacerbated the cost spike. Alaska stated that margins in Singapore increased by more than 400% during the first quarter. This made what was usually one of their cheapest fuel sources into its most expensive source.

Singapore is still a major long-term advantage for the airline. The airline is aiming to increase its fuel sourcing from Singapore to up to 30%-40% over time.

The demand remains strong across the board. The airline reported that premium travel rose by 8%, corporate travel was up 19% and advance bookings for corporate customers were nearly 30% higher.

Alaska has said that it does not anticipate fuel supply disruptions on its network. However, the industry must address long-term issues with jet fuel supply, particularly along the U.S. West Coast where refinery and pipeline capacity are limited.

The airline said that it has reduced capacity in certain markets to protect its margins, while continuing to invest on premium seating, expansion internationally and loyalty. (Reporting and editing by Nick Zieminski, Rajesh Kumar Singh)

(source: Reuters)