Big Slick
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- Oct 18, 2004
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NEW YORK (AFX) - For years, Southwest Airlines Co. has enjoyed a multi-million advantage over competitors, the fruit of a financial gamble.
But the advantage is declining, and analysts say that may be panacea for an industry that's struggling to raise its fares to match fuel costs while still competing with Southwest's lower fares.
Years ago, Southwest bet that oil prices would rise. It set hedge positions, allowing it to today pay close to 2002 prices for jet fuel. For the last nine months of 2006, Southwest has locked in prices for over 70 percent of anticipated fuel usage, set at crude oil prices of $36 per barrel. Those low costs allow Southwest to undercut its competitors.
But Southwest's hedge portfolio is diminishing: It's 60 percent hedged in 2007 at $39 per barrel, 35 percent hedged in 2008 at $38 per barrel and 30 percent hedged for 2009 at $39 per barrel.
To be sure, Southwest is still the hedge king among airlines. Some old-line legacy carriers have between zero and 10 percent of their needs hedged for this year.
But as its cushion against high fuel prices declines, it will feel more pressure to raise fares, said Mike Boyd, a Colorado-based airline industry consultant.
That will relieve pressure on the industry, which has been fighting to raise fares to improve revenue and match rising costs.
Southwest made a great gamble earlier in the decade when it set the hedge positions, Boyd said, but it's not something the Dallas-based low-cost carrier can easily replicate.
It takes cash to put up as collateral to make certain types of hedge contracts; it also takes conviction that oil prices will rise even further in the future.
"At the prices at which you can hedge now, do you really want to do it?" asked Robert Mann, a Port Washington, N.Y.-based airline industry consultant.
UAL Corp.'s United Airlines has zero fuel hedges in place for the rest of 2006, the Elk Grove Village, Ill.-based company said in its May quarterly report.
American Airlines has 30 percent of its second-quarter consumption hedged, capped at a price of $62 per barrel, and 23 percent of its full-year 2006 consumption hedged at a $61 per barrel cap as of April 19, said a spokesman for Dallas-based parent company AMR Corp.
Delta Air Lines Inc., which is operating under bankruptcy court protection, won approval last year to hedge up to 50 percent of its fuel consumption, a spokeswoman said. The Atlanta-based company hedged 26 percent of its February needs and 10 percent of its March fuel burn, but the airline hasn't disclosed its future positions.
AirTran Holdings Inc. Chief Financial Officer Stan Gadek said the offers he's seeing for hedging contracts today aren't very attractive.
"The challenge is you can not get good pricing on futures contracts right now, because there is so much uncertainty from the traders' standpoint," he said in an interview from his Orlando, Fla., office. "It used to be the further out you went in the timeline, the cheaper the hedges were. Not any more."
AirTran is hedged 24 percent for the second quarter, at a price range for jet fuel of between $2 and $2.05 per gallon including taxes and fees. Through 2007, it's hedged about 15 percent. Gadek said he's continuing to look for more hedging opportunities daily.
But the industry's real need is "for airplane ticket prices to catch up" to the fuel prices, he said.
But the advantage is declining, and analysts say that may be panacea for an industry that's struggling to raise its fares to match fuel costs while still competing with Southwest's lower fares.
Years ago, Southwest bet that oil prices would rise. It set hedge positions, allowing it to today pay close to 2002 prices for jet fuel. For the last nine months of 2006, Southwest has locked in prices for over 70 percent of anticipated fuel usage, set at crude oil prices of $36 per barrel. Those low costs allow Southwest to undercut its competitors.
But Southwest's hedge portfolio is diminishing: It's 60 percent hedged in 2007 at $39 per barrel, 35 percent hedged in 2008 at $38 per barrel and 30 percent hedged for 2009 at $39 per barrel.
To be sure, Southwest is still the hedge king among airlines. Some old-line legacy carriers have between zero and 10 percent of their needs hedged for this year.
But as its cushion against high fuel prices declines, it will feel more pressure to raise fares, said Mike Boyd, a Colorado-based airline industry consultant.
That will relieve pressure on the industry, which has been fighting to raise fares to improve revenue and match rising costs.
Southwest made a great gamble earlier in the decade when it set the hedge positions, Boyd said, but it's not something the Dallas-based low-cost carrier can easily replicate.
It takes cash to put up as collateral to make certain types of hedge contracts; it also takes conviction that oil prices will rise even further in the future.
"At the prices at which you can hedge now, do you really want to do it?" asked Robert Mann, a Port Washington, N.Y.-based airline industry consultant.
UAL Corp.'s United Airlines has zero fuel hedges in place for the rest of 2006, the Elk Grove Village, Ill.-based company said in its May quarterly report.
American Airlines has 30 percent of its second-quarter consumption hedged, capped at a price of $62 per barrel, and 23 percent of its full-year 2006 consumption hedged at a $61 per barrel cap as of April 19, said a spokesman for Dallas-based parent company AMR Corp.
Delta Air Lines Inc., which is operating under bankruptcy court protection, won approval last year to hedge up to 50 percent of its fuel consumption, a spokeswoman said. The Atlanta-based company hedged 26 percent of its February needs and 10 percent of its March fuel burn, but the airline hasn't disclosed its future positions.
AirTran Holdings Inc. Chief Financial Officer Stan Gadek said the offers he's seeing for hedging contracts today aren't very attractive.
"The challenge is you can not get good pricing on futures contracts right now, because there is so much uncertainty from the traders' standpoint," he said in an interview from his Orlando, Fla., office. "It used to be the further out you went in the timeline, the cheaper the hedges were. Not any more."
AirTran is hedged 24 percent for the second quarter, at a price range for jet fuel of between $2 and $2.05 per gallon including taxes and fees. Through 2007, it's hedged about 15 percent. Gadek said he's continuing to look for more hedging opportunities daily.
But the industry's real need is "for airplane ticket prices to catch up" to the fuel prices, he said.
