business

While crude oil is nearly 20 percent higher than the price Northwest Airlines anticipated when it came out of bankruptcy in May, CEO Doug Steenland said Wednesday the airline is coping through fuel hedges, higher fares and new aircraft.

This week, Northwest took delivery of its 32nd Airbus A330, which primarily is used on flights to Asia and Europe. Among U.S. and European carriers, Steenland said that Northwest now operates the youngest fleet in transatlantic service. It's spending about $6 billion over several years to renew its fleet.

The A330 "is 30 percent more fuel efficient than the DC-10 airplanes that it's been replacing," Steenland said. Northwest estimates that it is saving more than $200 million a year on fuel with the A330s.

It needs the savings: The airline's fuel bill was $849 million for the second quarter this year -- the biggest cost in its operating budget. Oil is currently selling near $88 a barrel; the company's business plan coming out of bankruptcy was predicated on $75-a-barrel oil.

Steenland said in an interview that Northwest and other big carriers have adapted their business plans in response to the higher fuel costs. They "have all reduced domestic capacity, and I think that has created a better alignment between supply and demand," he said. Those choices have increased pricing power on U.S. routes.

American Airlines recently led a $10 increase on many roundtrip domestic fares that Northwest and others matched to help offset higher fuel prices.

"That's a positive step," Steenland said. Northwest expects to report a third-quarter profit Oct. 29.

While some forecasters believe that the cost of oil will keep rising, Steenland said most experts he consults believe prices will fall.

"No one's crystal ball is perfect here," Steenland said. But he added that the consensus is that "oil is not going to stay at $87 a barrel -- it should come down."

Southwest set the standard

In recent years, Southwest Airlines had a decided advantage over other carriers through its long-standing fuel hedges, and as a result many airlines chose to keep their fares low to stay competitive.

Since its bankruptcy, Northwest has increased its ability to have hedges of its own. About half of its oil-price exposure for the last four months of this year is hedged. "Forty percent of the exposure is hedged using collars with a floor of approximately $56 per barrel and a ceiling of approximately $75 per barrel," Northwest said recently.

"Relative to the industry, we've done a good job" of hedging, Steenland said.

While the new A330s are helping reduce the airline's fuel costs, Bear Stearns analyst Frank Boroch noted that Northwest still has a "fuel efficiency disadvantage to other carriers" on domestic routes, because of its 35-year-old DC-9s.

The carrier has started to take delivery of 72 new 76-seat regional jets manufactured by Bombardier and Embraer, but it has not disclosed when it will replace the 100-seat DC-9s.

Liz Fedor • 612-673-7709

Liz Fedor • lfedor@startribune.com