Luv is 80 % hedged and U is 20 what does that tell you.......
CHICAGO, March 10 (Reuters) - As jet fuel prices continue to soar, the chances that the U.S. airline industry will return to profitability this year are slipping, analysts said.
To make matters worse, not many airlines have sufficiently hedged their exposure to rising jet fuel prices, leaving them open to the risk of even higher prices.
Jet fuel -- at its highest level in a year -- makes up 12 to 14 percent of airlines' operating costs and is their second-biggest operating expense after labor. High fuel prices are the latest challenge for the industry, which has been struggling with weak revenue and soft demand for more than two years.
"It's a major concern," said Blaylock & Partners analyst Ray Neidl. "If fuel prices stay at current levels and airlines cannot pass these fuel costs on to consumers ... then the industry will not return to profitability this year."
Airlines have tried several times this year to raise prices to offset fuel costs. But with relatively weak demand, fuel surcharges have failed to stick.
Morgan Stanley airline analyst William Greene on Tuesday cut earnings estimates across the board, with the most significant changes at carriers with little hedging -- or strategies to offset exposure to volatile prices -- in place.
He said none of the major network carriers is likely to be profitable this year if crude averages $34 per barrel, although all of the low-cost carriers should remain in the black.
"As hedges roll off at various airlines, the full effect of the currently high fuel prices will be felt with increasing severity," Greene wrote in a note.
Crude prices -- at 20-year highs near $36 per barrel -- have jumped since OPEC (News - Websites) agreed to cut supply quotas from April and to eliminate production over current quotas.
Each dollar rise in crude oil equates to a 3-cent gain per gallon in jet fuel, said David Swierenga, airline industry consultant at AeroEcon. With industry consumption of 18 billion gallons a year, each penny increase in jet fuel adds $180 million to industry operating costs.
Jet fuel prices, closely tied to crude and heating oil, could start to decline this summer as crude prices are projected to fall and as heating oil tends to weaken in warmer weather. But tight supplies, low inventories and international tensions could also keep prices propped up, analysts said.
PRECIOUS COMMODITY
If crude moves below $30 a barrel, airlines could be tempted to lock in hedges again, said Paul Flemming, senior analyst at Energy Security Analysis Inc.
"At these high levels, I understand why airlines would not be stepping up right now," Flemming said.
Airlines use many complex strategies to hedge exposure to volatile fuel prices. Many use a combination of the NYMEX heating oil futures contract, over-the-counter jet fuel swaps, and call options in a rising price environment.
Southwest Airlines (NYSE:LUV - News), which has been consistently profitable while its larger peers falter, is more than 80 percent hedged this year and has spent less than $25 million on 2004 fuel hedges.
Based on current futures prices, the low-cost carrier's savings from hedges would be about $240 million this year, Chief Financial Officer Gary Kelly told Reuters in an interview.
"You probably wouldn't go without health care insurance, you wouldn't go without liability and collision insurance for your automobile," Kelly said. "We view this the same way."
Delta Air Lines (NYSE😀AL - News) said recently it was 52 percent hedged for the first quarter, while American Airlines parent AMR Corp. (NYSE:AMR - News) and US Airways Group (NasdaqNM:UAIR - News) said they were about 20 percent hedged.
Continental is 20 percent hedged for the second half of this year and has said it is looking to add more hedges, while Northwest Airlines (NasdaqNM:NWAC - News) and United Airlines parent UAL Corp. (OTC BB:UALAQ.OB - News) have said they have no hedges in place.
Hedges are expensive, and airlines hesitate to lock themselves into high prices when they think prices will soon decline.
"If you're looking ahead and you think prices are going to fall, the less expensive solution is to just not hedge at all," Swierenga said. "What we've got here is a situation where just about everybody guessed wrong."
CHICAGO, March 10 (Reuters) - As jet fuel prices continue to soar, the chances that the U.S. airline industry will return to profitability this year are slipping, analysts said.
To make matters worse, not many airlines have sufficiently hedged their exposure to rising jet fuel prices, leaving them open to the risk of even higher prices.
Jet fuel -- at its highest level in a year -- makes up 12 to 14 percent of airlines' operating costs and is their second-biggest operating expense after labor. High fuel prices are the latest challenge for the industry, which has been struggling with weak revenue and soft demand for more than two years.
"It's a major concern," said Blaylock & Partners analyst Ray Neidl. "If fuel prices stay at current levels and airlines cannot pass these fuel costs on to consumers ... then the industry will not return to profitability this year."
Airlines have tried several times this year to raise prices to offset fuel costs. But with relatively weak demand, fuel surcharges have failed to stick.
Morgan Stanley airline analyst William Greene on Tuesday cut earnings estimates across the board, with the most significant changes at carriers with little hedging -- or strategies to offset exposure to volatile prices -- in place.
He said none of the major network carriers is likely to be profitable this year if crude averages $34 per barrel, although all of the low-cost carriers should remain in the black.
"As hedges roll off at various airlines, the full effect of the currently high fuel prices will be felt with increasing severity," Greene wrote in a note.
Crude prices -- at 20-year highs near $36 per barrel -- have jumped since OPEC (News - Websites) agreed to cut supply quotas from April and to eliminate production over current quotas.
Each dollar rise in crude oil equates to a 3-cent gain per gallon in jet fuel, said David Swierenga, airline industry consultant at AeroEcon. With industry consumption of 18 billion gallons a year, each penny increase in jet fuel adds $180 million to industry operating costs.
Jet fuel prices, closely tied to crude and heating oil, could start to decline this summer as crude prices are projected to fall and as heating oil tends to weaken in warmer weather. But tight supplies, low inventories and international tensions could also keep prices propped up, analysts said.
PRECIOUS COMMODITY
If crude moves below $30 a barrel, airlines could be tempted to lock in hedges again, said Paul Flemming, senior analyst at Energy Security Analysis Inc.
"At these high levels, I understand why airlines would not be stepping up right now," Flemming said.
Airlines use many complex strategies to hedge exposure to volatile fuel prices. Many use a combination of the NYMEX heating oil futures contract, over-the-counter jet fuel swaps, and call options in a rising price environment.
Southwest Airlines (NYSE:LUV - News), which has been consistently profitable while its larger peers falter, is more than 80 percent hedged this year and has spent less than $25 million on 2004 fuel hedges.
Based on current futures prices, the low-cost carrier's savings from hedges would be about $240 million this year, Chief Financial Officer Gary Kelly told Reuters in an interview.
"You probably wouldn't go without health care insurance, you wouldn't go without liability and collision insurance for your automobile," Kelly said. "We view this the same way."
Delta Air Lines (NYSE😀AL - News) said recently it was 52 percent hedged for the first quarter, while American Airlines parent AMR Corp. (NYSE:AMR - News) and US Airways Group (NasdaqNM:UAIR - News) said they were about 20 percent hedged.
Continental is 20 percent hedged for the second half of this year and has said it is looking to add more hedges, while Northwest Airlines (NasdaqNM:NWAC - News) and United Airlines parent UAL Corp. (OTC BB:UALAQ.OB - News) have said they have no hedges in place.
Hedges are expensive, and airlines hesitate to lock themselves into high prices when they think prices will soon decline.
"If you're looking ahead and you think prices are going to fall, the less expensive solution is to just not hedge at all," Swierenga said. "What we've got here is a situation where just about everybody guessed wrong."
