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U.S. airlines hedging against high fuel costs

U.S. airlines are hedging more of their fuel costs this year to protect themselves against a possible rise in the price of oil which some expect could eclipse lofty levels hit last year, according to a Reuters survey of top carriers.
/ Source: Reuters

U.S. airlines are hedging more of their fuel costs this year to protect themselves against a possible rise in the price of oil which some expect could eclipse lofty levels hit last year, according to a Reuters survey of top carriers.

After getting smacked by surging fuel costs in recent years as well-hedged rivals such as Southwest Airlines saw their profits rise, many airlines are taking out or expanding fuel futures positions to shield their bottom lines from one of their costliest areas.

AMR Corp.'s American Airlines has taken positions to buy 30 percent of first-quarter consumption at $63 a barrel for crude oil and 18 percent of its full-year fuel needs at $60 a barrel, up from between 5 and 8 percent, respectively, in 2005.

"We clearly started doing more toward the end of last year," company spokesman Tim Smith said.

The airline industry has been severely weakened by soaring fuel costs and low-fare competition that makes it difficult for the carriers to raise ticket prices enough to cover costs.

U.S. crude prices hit record highs of around $70 a barrel last year after hurricanes damaged key oil production and refining facilities along the U.S. Gulf Coast, sending airline fuel costs up around 40 percent over 2004.

Strong demand and new U.S. fuel specifications are conspiring to push prices higher this year to an average of $60.32 a barrel, according to a recent Reuters poll, up from an average of $56.70 in 2005.

But even as companies seek to mitigate such rising fuel risk, analysts warn that a fall in oil prices could quickly turn their protection into a liability.

"If you lock in hedges here at $60 a barrel and prices go much lower, you are obviously doubling your pain," said Jim Corridore, airline equity analyst for S&P equity research services.

Price protection
Bankrupt Northwest Airlines said in recent government filings that it has not hedged its fuel exposure. In recent years, some carriers have gone unhedged simply because they couldn't afford the hedging instruments.

High price forecasts have prompted JetBlue Airways — which analysts say stumbled by failing to use its solid cash position to hedge earlier — to create a vice president for fuel purchasing position and ramp up its protective positions.

JetBlue has taken out collar options with upside protection for 67 percent of consumption at $68 a barrel for the first quarter, and currently has options for around 35 percent of its fuel needs near that price for the year. JetBlue had hedged 20 percent of its fuel at $29.95 a barrel for 2005.

"If fuel spikes again to $70 we have some protection," said a company spokeswoman.

After not taking out any hedges in 2005, bankrupt Delta Air Lines hedged 26 percent of its February jet fuel at $1.75 per gallon, lower than current jet prices of around $1.84 a gallon. Alaska Air has hedged 46 percent of oil demand at $41 a barrel in 2006, down slightly from 50 percent at $30 a barrel last year.

Southwest Airlines, which has weathered the surge in fuel costs better than many companies through long-term positions taken out before oil prices spiked, has hedged 70 percent of its fuel at $36 a barrel compared to 85 percent at $26 a barrel in 2005.

Continental Airlines Inc, which previously had no hedges, said recently it had entered into petroleum swap contracts to hedge "a minimum portion of our projected 2006 fuel requirements."

U.S. Airways is currently hedged for an average of 32 percent of its consumption for 2006, but is seeking to increase that volume to 50 percent.

UAL Corp's United Airlines, which opened hedges on a small portion of its fuel needs in 2005, had not taken any new positions this year, according to the company's financial statements in January.