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"No idling" policy saves fuel: Companies look to curb energy costs

By James F. Peltz
Los Angeles Times

ANACLETO RAPPING / LOS ANGELES TIMES A United Parcel Service driver leaves the downtown Los Angeles depot. Drivers are instructed to turn off their engines for even brief drop-offs to save fuel. Nonetheless, the company's fuel costs are 29 percent higher than a year earlier.

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As United Parcel Service'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 is 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 percent, 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 especially hurts the fuel-reliant transportation industry.

Gone are the days when Transport Express in Los Angeles 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.

The airline industry had hoped that 2004 would be the year it recovered from its post-Sept. 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, which helps companies develop fuel strategies.

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

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

Hedging effectively enables them to lock in prearranged prices for fuel, so that they are not hurt if prices jump above those levels.
 
Discount carrier Southwest Airlines hedges extensively, with about 80 percent of its fuel needs for the next two years locked in at prices below current market levels. But 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 Air Lines has no hedges in place, and in the second quarter its fuel costs soared 54 percent from a year earlier, to $669 million from $435 million.

What's more, unlike some industries, the airlines struggle to impose fuel surcharges on travelers. Carriers that try usually withdraw the fees on certain routes if their rivals don't match them. With fare competition already intense, no airline wants to stand out with a higher fare and lose even a bit of market share.

But United Airlines said yesterday it would raise its existing $10 each-way fuel surcharge by an additional $5 due to soaring fuel costs

Larger trucking companies and major shipping companies such as UPS and FedEx, which have long-term accounts with big companies, have had more success making surcharges stick.

But how long that may last is anybody's guess.

Indeed, Black of UPS said that even though record prices for fuel were taking a chunk out of the company's bottom line, "our biggest concern with rising fuel prices is the potential threat to U.S. economic growth."

"We're a company that benefits greatly when the economy is growing," he said, "but a jump in fuel expenses like we've seen over the last couple of months is worrisome."

Material from Reuters is used in this report.