Southwest Airlines Co., the most profitable U.S. airline, has locked in prices for 80% of its jet-fuel costs through the end of next year — more than any of its rivals. Other carriers may have lost their chance to hedge prices.
Surging oil prices are forcing airlines to decide whether to buy jet fuel months in advance, when prices are at a 14-year high, or hold off and wait for lower prices. Higher fuel costs contributed to a combined $3.99 billion loss in the first half of the year for the 10 largest U.S. carriers. Southwest had $139 million net income in the first half.
''Clearly, high fuel prices are hurting the airlines and eating into their bottom lines,'' says Michael Cuggino, who manages $260 million at Pacific Heights Asset Management LLC in San Francisco — and shed such airline holdings as United Airlines parent UAL Corp. and Alaska Air Group Inc. last year. ''I'm not sure now is the time to hedge fuel costs, with prices sky high.''
Crude oil has risen 43% this year to reach a one-month high of $46.35 a barrel on the New York Mercantile Exchange, hurting airlines that spent years recovering after the Sept. 11, 2001, terrorist attacks cut travel. Oil prices are crimping sales and profits from railroad Union Pacific Corp. to Wal-Mart Stores Inc.; U.S. economic growth has slowed to 2.8% in the second quarter from 4.5% in the previous three months.
Southwest, the sixth-largest U.S. carrier, used options on New York crude-oil futures contracts to lock in prices for 80% of its 2004 and 2005 fuel needs at $24 and $25 a barrel, company filings show.
How's it work?
Hedging is the use of advance purchases and contracts such as options to protect against price fluctuations. An option gives an investor the right, but not the obligation, to buy or sell a security or commodity at a set price in the future.
Dallas-based Southwest has 45% of its 2006 fuel deliveries hedged at $28 a barrel, according to filings. It declined to comment on its hedging strategy.
''Nobody's even close to Southwest in terms of how well they've done in locking in fuel prices,'' says Joe Fath, an analyst at T. Rowe Price Group in Baltimore. His company manages more than $200 billion, including shares of Southwest and New York-based JetBlue Airways Corp. ''A number of the other carriers aren't even in a position to hedge.''
Wall Street analysts expect the price of benchmark crude oil traded on the New York Mercantile Exchange to fall to an average of $32.34 a barrel in 2005, the median of 39 estimates gathered by Thomson Financial, a unit of Toronto-based Thomson Corp.
'No hedge' Delta
Delta, the third-largest U.S. airline, isn't using futures contracts, swaps or any other hedging tools to control fuel costs, says Anthony Black, a spokesman for the Atlanta-based carrier. He declined to comment further.
Delta had a loss of $2.35 billion for the first six months of 2004, the biggest of any of the 10 largest U.S. airlines, and its auditor, Deloitte & Touche LLP, has questioned Delta's ability to stay in business.
Some airlines can't afford to buy fuel in advance. The airline industry has been battered in the past 3½ years by the U.S. economic recession, the Sept. 11 attacks, and an outbreak of severe acute respiratory syndrome last year that discouraged air travel. The industry lost a combined $23.2 billion in the three years ending in 2003 and two of the top 10 U.S. airlines — UAL and US Airways Group Inc. — are in bankruptcy proceedings.
American Airlines, the world's biggest carrier, and Delta have been unable to hedge most of their fuel costs because they need to use the money to avoid bankruptcy, T. Rowe Price analyst Fath says.
''It's a luxury some airlines don't have because they need that cash for a lot of other stuff,'' he says.
Surging oil prices are forcing airlines to decide whether to buy jet fuel months in advance, when prices are at a 14-year high, or hold off and wait for lower prices. Higher fuel costs contributed to a combined $3.99 billion loss in the first half of the year for the 10 largest U.S. carriers. Southwest had $139 million net income in the first half.
''Clearly, high fuel prices are hurting the airlines and eating into their bottom lines,'' says Michael Cuggino, who manages $260 million at Pacific Heights Asset Management LLC in San Francisco — and shed such airline holdings as United Airlines parent UAL Corp. and Alaska Air Group Inc. last year. ''I'm not sure now is the time to hedge fuel costs, with prices sky high.''
Crude oil has risen 43% this year to reach a one-month high of $46.35 a barrel on the New York Mercantile Exchange, hurting airlines that spent years recovering after the Sept. 11, 2001, terrorist attacks cut travel. Oil prices are crimping sales and profits from railroad Union Pacific Corp. to Wal-Mart Stores Inc.; U.S. economic growth has slowed to 2.8% in the second quarter from 4.5% in the previous three months.
Southwest, the sixth-largest U.S. carrier, used options on New York crude-oil futures contracts to lock in prices for 80% of its 2004 and 2005 fuel needs at $24 and $25 a barrel, company filings show.
How's it work?
Hedging is the use of advance purchases and contracts such as options to protect against price fluctuations. An option gives an investor the right, but not the obligation, to buy or sell a security or commodity at a set price in the future.
Dallas-based Southwest has 45% of its 2006 fuel deliveries hedged at $28 a barrel, according to filings. It declined to comment on its hedging strategy.
''Nobody's even close to Southwest in terms of how well they've done in locking in fuel prices,'' says Joe Fath, an analyst at T. Rowe Price Group in Baltimore. His company manages more than $200 billion, including shares of Southwest and New York-based JetBlue Airways Corp. ''A number of the other carriers aren't even in a position to hedge.''
Wall Street analysts expect the price of benchmark crude oil traded on the New York Mercantile Exchange to fall to an average of $32.34 a barrel in 2005, the median of 39 estimates gathered by Thomson Financial, a unit of Toronto-based Thomson Corp.
'No hedge' Delta
Delta, the third-largest U.S. airline, isn't using futures contracts, swaps or any other hedging tools to control fuel costs, says Anthony Black, a spokesman for the Atlanta-based carrier. He declined to comment further.
Delta had a loss of $2.35 billion for the first six months of 2004, the biggest of any of the 10 largest U.S. airlines, and its auditor, Deloitte & Touche LLP, has questioned Delta's ability to stay in business.
Some airlines can't afford to buy fuel in advance. The airline industry has been battered in the past 3½ years by the U.S. economic recession, the Sept. 11 attacks, and an outbreak of severe acute respiratory syndrome last year that discouraged air travel. The industry lost a combined $23.2 billion in the three years ending in 2003 and two of the top 10 U.S. airlines — UAL and US Airways Group Inc. — are in bankruptcy proceedings.
American Airlines, the world's biggest carrier, and Delta have been unable to hedge most of their fuel costs because they need to use the money to avoid bankruptcy, T. Rowe Price analyst Fath says.
''It's a luxury some airlines don't have because they need that cash for a lot of other stuff,'' he says.
