How an Airline CFO Eases Its Pain at the Pump

John Rainey
Source: United
John Rainey

Consumers are no stranger to the impact that high gas prices can have on a budget. Gas prices have increased 130 percent over the last decade, and when gas prices soar, motorists adjust to ease pain at the pump. By carpooling or taking public transportation, cutting back on unnecessary driving and reducing spending on other things like dining out and clothing, they use a combination of tactics to blunt the effects of climbing prices.

In the airline industry, we are especially vulnerable to the high price and volatility of oil. At United, jet fuel is our single largest expense—in 2012, we spent more on fuel than we spent on salaries, aircraft maintenance, facility rent and landing fees combined. On a yearly basis, we consume more than a full day of the global production of oil (that's almost 100 million barrels annually). When the price of oil increases $1 per barrel, it equates to about $100 million of increased costs to United annually.

The 2008 fuel run-up changed the landscape. Higher prices choked off demand and brought on new supply. Today, oil demand in the U.S. economy is at a 17-year low, while the U.S. supply of oil is at a 20-year high. The International Energy Agency projects that the U.S. will surpass Saudi Arabia in oil production by 2020.

With such massive exposure to oil, airlines need to be more aggressive today than ever before in managing through swings in oil prices. For United, like companies across the globe, that means getting beyond the basics of conservation.

(Watch:United CFO on the Hype Behind the 'Price War')

When talking to my fellow CFOs at the CNBC CFO Council event in February, I was interested to hear how climbing fuel costs affect each of our industries in different ways. Whether it's the skyrocketing cost of trucking products across the country or consumers spending less on discretionary items during lean economic times, as CFOs we have to find creative ways to buffer against what high fuel prices do to our bottom line.

The unpredictability and rapid changes in the cost of fuel make it difficult for airlines to plan for the long term, yet the industry has generated three years of consecutive profitability—something that hasn't happened since 2000. So what are we doing to ease the pain at the pump?

In the short term, we hedge our jet-fuel needs to protect us from big changes in jet-fuel prices between the time a customer buys his or her ticket and when he or she takes the flight. We sell tickets starting 331 days before a flight departs, and a lot can change in the cost to carry that customer in those 331 days. We view hedging like an insurance policy, to help us guard against steep, quick increases in fuel prices that we cannot effectively pass through. Fuel hedging is a delicate balance, and, just like insurance, we want to buy just enough fuel hedges so that we don't purchase more protection than we need or can afford. We've hedged 35 percent of our expected fuel needs for the rest of 2013.

Our best long-term defense is, however, a modern and fuel-efficient fleet, because no matter what the price of jet fuel is, we're going to burn less of it. Fundamental to our fleet strategy is preserving the flexibility to respond to economic conditions while balancing that with replacing older, less-efficient aircraft with new-generation aircraft that have better operating economics. We were the North American launch customer for the Boeing 787, which burns approximately 20 percent less fuel than comparable aircraft, whether fuel is $120, $100 or $80 a barrel. Because our U.S. competitors won't get the 787 for several more years, we have a tremendous advantage.

(Read More: CFOs Expect to Spend More)

The biggest thing we can do to mitigate the impact of high fuel prices is to continue investing in fuel-efficient operations and a fuel-efficient fleet. Those efforts are paying off—we've improved fuel efficiency by more than 32 percent since 1994. Our quest for fuel savings goes beyond our aircraft. At our airports, nearly 25 percent of our ground-service equipment is electric or alternatively fueled.

Even small improvements in consumption can go a long way when you consume four billion gallons of jet fuel annually. In any industry we have to partner with the front line to take steps to improve efficiency. For example, at United, when possible, our pilots taxi aircraft on one engine, and our ramp employees hook the aircraft at the gate to ground power rather than the fuel-consuming auxiliary power unit.

We'll continue to look for new hedges against fuel volatility—we are hopeful about developments in biofuels, but until they are produced at a scale and price that competes with traditional jet fuel, we will focus on improving efficiencies in other ways, too.

For example, we became the first major network carrier to provide all pilots with Apple iPads, which save an estimated 16 million sheets of paper and 326,000 gallons of jet fuel a year because pilots no longer have to carry paper flight manuals that weigh about 38 pounds each.

We're also introducing a new flight-planning management tool for our crews and dispatchers to utilize when choosing the best altitudes and speeds at which to fly, given weather and other factors. This innovative system will calculate the lowest-cost route based on flight requirements, allowing us to fly more efficiently and burn less fuel. We expect the system will save us millions of dollars each year.

It is an exciting time to be in this industry, because we are running United like a real business, one that embeds flexibility and efficiency into every aspect of the business. The industry had roughly the same level of profitability in 2007 and 2012, but the industry absorbed an additional $13 billion of fuel expense in 2012. This is a result of the flexibility of the industry and pricing our product at more than it costs to deliver.

Our goal is to be sustainably and sufficiently profitable, no matter what the price of oil. By creating economic value every year, United will be able to continue to make the right investments for our customers and employees.