canyonblue
Everyone loves Southwest
- Joined
- Nov 26, 2001
- Posts
- 2,314
Southwest Airlines gets boost from record oil
NEW YORK/CHICAGO (Reuters) - A resounding "yeehaw" heard in Texas as oil prices hit new highs may not just be from the state's oil producers; Southwest Airlines Co, the lone big-time price hedger among U.S. airlines, might also be whooping it up.
While rising oil prices typically mean soaring jet fuel costs, Dallas-based Southwest's fuel hedges give it a unique edge over competitors that will only have grown as U.S. crude hit a record high above $95 a barrel on Friday.
"The airlines that are less hedged are probably feeling more of a pinch because of the higher prices, especially relative to Southwest," said Michael Waldron, an energy analyst at Lehman Bros. "They have a more advantageous position."
Fuel hedges -- financial products that give a buyer the right to buy fuel at a guaranteed price -- protect companies from price rises, but also boost their costs when prices fall.
Over the last nine months, the value of Southwest's fuel hedging contracts -- the difference between the hedged rate and current market prices -- has risen about 50 percent to $1.5 billion as of the end of September.
For the fourth quarter, the leading U.S. low-cost carrier has hedged 90 percent of its expected fuel needs at an average crude price of just $51 a barrel -- a big advantage in an industry in which fuel vies with labor as the largest expense.
Other carriers also hedge, but not nearly to the extent, nor as successfully, as Southwest. AMR Corp's, American Airlines, for instance, has hedged 40 percent of its expected fourth-quarter fuel needs, capped at a crude oil price of about $69 a barrel.
Southwest's strong hedging position is evident in its fourth-quarter fuel price forecast.
The carrier expects to pay $1.80 per gallon for jet fuel -- about 50 cents below the expectations of most competitors and 70 cents lower than the forecast of UAL Corp's (UAUA.O: Quote, Profile, Research) United Airlines.
WEATHERING THE STORM
U.S. airlines as a group have so far fared well despite volatile oil markets, posting solid third-quarter profits. Also, Southwest still has to contend with a rising wage bill, which will likely keep it from lowering fares.
"Southwest has non-fuel costs that are probably rising faster than anybody else," said airline consultant Robert Mann. "They will be in a mode of taking price when they can."
While fuel prices remain a concern, the industry, which is recovering from a prolonged slump, has cut costs, slashed capacity growth, and increased fares.
"We're all reporting profits," Doug Parker, chief executive at US Airways Group, said on a conference call this week. "That, I think, is a pivotal and probably momentous change in our industry."
But so long as fuel prices keep rising, consumers can expect to pay more for air travel.
"At the end of the story, it's going to come out of the consumer's pocket," said Stuart Klaskin of aviation consultancy Klaskin Kushner & Co.
The latest move came from Continental Airlines Inc, which said on Friday it raised U.S. domestic fares by $10 per round-trip to offset oil price rises. That represents the sixth U.S. fare increase since Labor Day weekend in early September.
NEW YORK/CHICAGO (Reuters) - A resounding "yeehaw" heard in Texas as oil prices hit new highs may not just be from the state's oil producers; Southwest Airlines Co, the lone big-time price hedger among U.S. airlines, might also be whooping it up.
While rising oil prices typically mean soaring jet fuel costs, Dallas-based Southwest's fuel hedges give it a unique edge over competitors that will only have grown as U.S. crude hit a record high above $95 a barrel on Friday.
"The airlines that are less hedged are probably feeling more of a pinch because of the higher prices, especially relative to Southwest," said Michael Waldron, an energy analyst at Lehman Bros. "They have a more advantageous position."
Fuel hedges -- financial products that give a buyer the right to buy fuel at a guaranteed price -- protect companies from price rises, but also boost their costs when prices fall.
Over the last nine months, the value of Southwest's fuel hedging contracts -- the difference between the hedged rate and current market prices -- has risen about 50 percent to $1.5 billion as of the end of September.
For the fourth quarter, the leading U.S. low-cost carrier has hedged 90 percent of its expected fuel needs at an average crude price of just $51 a barrel -- a big advantage in an industry in which fuel vies with labor as the largest expense.
Other carriers also hedge, but not nearly to the extent, nor as successfully, as Southwest. AMR Corp's, American Airlines, for instance, has hedged 40 percent of its expected fourth-quarter fuel needs, capped at a crude oil price of about $69 a barrel.
Southwest's strong hedging position is evident in its fourth-quarter fuel price forecast.
The carrier expects to pay $1.80 per gallon for jet fuel -- about 50 cents below the expectations of most competitors and 70 cents lower than the forecast of UAL Corp's (UAUA.O: Quote, Profile, Research) United Airlines.
WEATHERING THE STORM
U.S. airlines as a group have so far fared well despite volatile oil markets, posting solid third-quarter profits. Also, Southwest still has to contend with a rising wage bill, which will likely keep it from lowering fares.
"Southwest has non-fuel costs that are probably rising faster than anybody else," said airline consultant Robert Mann. "They will be in a mode of taking price when they can."
While fuel prices remain a concern, the industry, which is recovering from a prolonged slump, has cut costs, slashed capacity growth, and increased fares.
"We're all reporting profits," Doug Parker, chief executive at US Airways Group, said on a conference call this week. "That, I think, is a pivotal and probably momentous change in our industry."
But so long as fuel prices keep rising, consumers can expect to pay more for air travel.
"At the end of the story, it's going to come out of the consumer's pocket," said Stuart Klaskin of aviation consultancy Klaskin Kushner & Co.
The latest move came from Continental Airlines Inc, which said on Friday it raised U.S. domestic fares by $10 per round-trip to offset oil price rises. That represents the sixth U.S. fare increase since Labor Day weekend in early September.
