By Doug Cameron and Bradley Olson
The highest oil prices in years are increasing expenses for
companies that had grown used to low energy costs since crude's
2014 tumble, while the turnabout is proving to be a boon for some
businesses.
Giant outfits from American Airlines Group Inc. to 3M Co. have
warned this week about how persistent higher oil prices are
boosting their expenses this year.
In response, some companies are looking to pass on the costs to
their customers, which would push inflation higher. That, in turn,
could slow growth and weigh on an already vulnerable stock
market.
"I do believe that consumers will pay more," said American
Airlines Chief Executive Doug Parker.
The airline on Thursday lowered its profit outlook for the year,
citing in part a 12% increase in the average price of jet fuel over
the past two weeks. Fuel is airlines' second-largest expense after
labor, and fare changes tend to lag movements in oil by several
months. Mr. Parker said he didn't think higher fares would hurt
demand.
The increased energy costs hurt in the first quarter because
West Texas Intermediate crude prices have remained above $60 for
much of the year, something not seen since late 2014. Higher energy
prices hit different industries over time, and it can take weeks or
months before they can pass their higher costs on to consumers or
vendors.
Railroad operator Union Pacific Corp. reported Thursday that its
fuel expenses surged 28% to $589 million in the latest quarter,
with most of the increase coming from a 22% increase in diesel
prices. However, Union Pacific passed along some of that higher
cost to customers through fuel surcharges, which totaled $353
million, up 67% from the year-earlier period.
The company, though, also benefited from higher demand for sand
used in shale-oil extraction and a surge in shipments of crude, as
higher oil prices spurred production. Union Pacific, which operates
in the western U.S. where much of the shale exploration occurs,
said its energy revenue jumped by 15% in the March quarter from the
year-ago period, growing twice as fast as its overall business.
Elsewhere, United Parcel Service Inc. said its fuel expenses
jumped 21%, or $129 million, in the March quarter. But the company
said fuel surcharges and higher prices helped offset rising
delivery costs in its U.S. ground business.
Rising diesel prices are weighing on trucking companies despite
a surging freight market, though some of those costs also get
passed on through fuel surcharges.
On Thursday, Schneider National Inc., a large trucking company
based in Green Bay, Wis., reported its fuel expenses rose 16% in
the first quarter to $84.7 million. The carrier's revenue from fuel
surcharges to customers jumped by 31% to $117.8 million.
USA Truck Inc., another national carrier, reported $13.5 million
in fuel expenses for the quarter, up 25% year-over-year. The Van
Buren, Ark.-based company said rising fuel was among several
factors offsetting strong freight demand.
Meanwhile, earnings at energy companies have surged. Royal Dutch
Shell PLC on Thursday posted its highest quarterly profit since
2013, when oil prices were peaking above $100 a barrel. In
addition, earnings jumped by more than half at ConocoPhillips and
Schlumberger Ltd., where officials noted that drilling activity
picked up in the second half of the quarter as prices stayed above
$60.
Exxon Mobil Corp. and Chevron Corp. are expected to post similar
gains when they report Friday.
Consumers are seeing the effects at the gas pump, where the
average price of $2.80 is the highest since June 2015. The U.S.
Energy Information Administration has estimated that the average
household will spend about $190 more on fuel in 2018 compared with
2017 -- a 9% increase.
Executives at both 3M and Caterpillar Inc. said this week that
they would raise prices to offset the hit to profits from rising
commodity prices.
"We are seeing some increases in raw material prices, in fact,
more than what we originally estimated," 3M Chief Financial Officer
Nicholas Gangestad said, adding that the maker of Scotch tape and
Post-it Notes faced higher transportation and material costs as oil
prices rose.
As was the case for Union Pacific, rising oil prices were at the
same time a positive for Caterpillar, which provides the pumps for
shale-well drilling and extraction. Caterpillar said sales of its
equipment and parts used in the oil and gas industries rose 50%
from the prior year to $1.2 billion in the first quarter.
"At the end of the day, higher commodity costs benefit many of
our customers. and they are one of the reasons we have seen several
of our end markets begin to recover," Caterpillar Chief Financial
Officer Brad Halverson said.
One factor that can blunt the impact of rapid oil-related cost
inflation is hedging, or locking in future prices, which is common
for airlines and other sectors where fuel costs can weigh heavily
on the bottom line.
Gary Kelly, chief executive of Southwest Airlines Co., was more
sanguine than American's Mr. Parker about the impact of the recent
rise, in part because the largest carrier of domestic passengers
has a longstanding hedging program.
"I think we're very well positioned to manage our way through a
real fuel price shock," he said. "What we have now is not an issue.
If we get to 100-plus dollars a barrel, then I think we have
something else to talk about."
--Andrew Tangel and Jennifer Smith contributed to this
article.
Write to Doug Cameron at doug.cameron@wsj.com and Bradley Olson
at Bradley.Olson@wsj.com
(END) Dow Jones Newswires
April 26, 2018 20:02 ET (00:02 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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