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Airlines pay for locking in fuel prices

Janet Babin Jan 21, 2009

Airlines pay for locking in fuel prices

Janet Babin Jan 21, 2009


KAI RYSSDAL: Airlines are some of the few companies that haven’t asked for government bailouts as the economy’s gone south. Doesn’t mean they’re necessarily doing well, though.

Even though fuel prices have backed way off their record highs this past summer, back then a lot of carriers locked in expensive futures contracts they can’t get out of now. That’s called hedging, and it’s the reason just about every U.S. airline is reporting losses for last year and part of this year. But no one’s come up with a better alternative.

Marketplace’s Janet Babin reports from North Carolina Public Radio:

JANET BABIN: Airlines release fourth-quarter earnings this week. Southwest is expected to post modest gains. But at both American and United Airlines, the losses are stark.

One reason is that fewer people are traveling because of the recession.

But analyst Ray Neidl at Calyon Securities says the airlines are also hurting because they bet that fuel prices would stay in a certain range. Instead, they turned volatile.

Ray Neidl: Now, with falling oil prices, they got to buy a lot of fuel at much higher prices, because that’s what they bought on their hedge.

The hedges will be running out by mid-year.

Airlines will probably be more careful going forward, but fuel hedging is an inexact science.

Analyst Norman Higby at WMP Forecasts says all the airlines are getting it wrong.

Norman Higby: They’re writing long-term contracts based on trends they can’t anticipate and short-term fluctuations. And the only thing you’re collectively getting are bad guesses and wrong answers.

But Higby’s just one expert.

Consultant Richard Aboulafia with the Teal Group says ask five more and you’ll get 10 more opinions on fuel hedging strategies.

Richard Aboulafia: Even though it doesn’t give much clarity, and even though it can come back and bite you, it still represents more clarity than we have.

Airlines hedge because knowing how much they’ll pay for fuel, no matter the price, is better than facing the great unknown.

Airlines are expected to return to profitability by summer, but not because they figured out the fuel-hedge formula. Instead, they’ll continue to cut jobs, tighten capacity, and hope the economy goes wheels up.

I’m Janet Babin for Marketplace.

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