Here is a report from Alaska's World about our fuel hedging program
Skyrocketing jet fuel prices are scorching air carriers’ economic recovery prospects, but Alaska Airlines is working hard to slow the burn of cash and gas.
The price of jet fuel has climbed more than 40 percent in recent months, prompting Alaska to expand its hedging program to blunt the price it pays for fuel.
At the same time, the airline has launched a wide-ranging effort—headed up by a newly created task force—to reduce the amount of fuel it burns.
For perspective on just how far the proverbial needle can be moved, consider this: Removing just five magazines from each aircraft can save $10,000 per year in fuel burn. That’s because it costs about $20 to fly one pound of weight on one aircraft for a full year.
Among the steps Alaska has taken to curb weight are:
Counting the number of children on board each flight. Previously, all passengers were calculated as adults, meaning unnecessary fuel was being loaded because the actual on board weight was less than calculated.
Reducing the weight of catering supplies on each aircraft, and also calculating precisely how many pounds of catering supplies are on each aircraft. Estimated savings: $100,000 per year.
But curbing weight is just one aspect of the effort to trim fuel costs.
Another is operational.
For instance, by installing life vests on Los Angeles-Cancun flights so aircraft can fly more direct routes, Alaska expects to save $100,000 per year.
The price of jet fuel has zoomed from 90 cents per gallon last fall to a record high of $1.30 per gallon in early March.
Annualized, every one cent increase in the price of jet fuel costs Alaska $3.5 million. If current prices hold steady through the end of 2004, which analysts expect, that could add up to a whopping $100 million of additional expense.
Fuel is Alaska’s second-biggest expense behind wages and benefits, accounting for more than 15 percent of total operating costs.
Many airlines, including Alaska, have tried to raise ticket prices in recent months to offset higher fuel costs. But fuel surcharges have failed to stick as low-cost airlines like Southwest and JetBlue have failed to go along.
Alaska is reexamining the cost/benefit of winglets. “They can reduce fuel burn by as much as 3.5 percent, but are expensive, especially when retrofitting existing aircraft,” says Scott Ridge, director of flight operations technical support. “The payback, in terms of reduced fuel consumption, needs to be on the order of a couple of years to make sense.”
Other examples:
Flying fuel-efficient Next Generation aircraft more than the older MD-80s and 737-200s and -400s. Estimated savings: $20 million per year.
Pilots consistently asking Air Traffic Control for permission to fly the most direct route whenever possible.
PRICE CONTROLS
On the price side of the equation, Alaska is beginning an investigation to expand and automate a tankering program of carrying extra fuel on certain flights to avoid refueling at stations with particularly high prices.
“With our current manual system we are getting about 80-90 percent of the benefit of tankering,” says Scott Ridge, director of flight operations technical support. “Automation will enable us to go after the remaining 10-20 percent.” That could mean additional savings of $100,000 per year.
The net result of the airline’s newer fleet and fuel conservation efforts has been a 6 percent reduction in the average number of gallons of jet fuel burned per flight hour since 1999, for estimated savings of $29 million in 2004.
Executive Vice President of Finance and Chief Financial Officer Brad Tilden says “All airlines are taking a beating on the fuel front, plain and simple, but we’re taking steps to mitigate the impact of the high cost of jet fuel as best we can. At the same time, we’re staying focused on improving our cost structure and competitive position in the marketplace.”
FUEL HEDGING
Crude oil, from which jet fuel is derived, is one of the world’s most volatile financial commodities. It spikes and dives, seemingly without logic. To try to clip off the peaks and valleys, Alaska Air Group hedges a portion of its fuel needs for Alaska and Horizon.
“We use two types of hedges—swaps and caps. The first locks in a fixed price for a certain quantity of fuel to be delivered at a future date. The second functions like an insurance policy to protect us against spikes in the price of jet fuel,” says Cindy Goodin, director of finance. “The goal though is the same—to even out price swings and the manage cash flow associated with fuel expense.”
Contrary to perception, “we’re not trying to make money with our hedging program,” says Goodin. “That would be speculating in the jet fuel market. We take a conservative approach. For us, hedging is simply a way to even out the price we pay for fuel, enabling us to better manage expenses.”
Currently, about 35 percent of Alaska’s jet fuel needs are hedged, at an average price of $28 per barrel well below the current crude oil price of $38 per barrel. The airline plans to increase hedged fuel to 50 percent beginning in the fourth quarter of 2004, continuing through 2005.
