Hedge Fuel Costs? Southwest-yes Usairways-no

[NYPD]

Once again, the employees are to blame for U's woes. Siegel and his "indispensible" team are not held accountable

Siegel:

Siegel said US Airways has no alternative but to match Southwest's fares on routes they both fly. But the company is in a bind because it is already reporting losses, so without lowering costs, any fare cuts will just increase the losses.

"Last year our average fare was $125. Unfortunately, it cost us $140 to carry that passenger, so every time a passenger got on one of our airplanes last year we were paying them $15," Siegel said in his Webcast.

Labor accounts for the largest share of airline costs, followed by fuel. Siegel told employees US Airways needs new labor agreements this summer to battle Southwest and Frontier in Philadelphia.

Airwise News:

Southwest Airlines, which has been consistently profitable while its larger peers falter, is more than 80 percent hedged this year and has spent less than USD$25 million on 2004 fuel hedges.

Based on current futures prices, the low-cost carrier's savings from hedges would be about USD$240 million this year, Chief Financial Officer Gary Kelly said.

"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 said recently it was 52 percent hedged for the first quarter, while American Airlines and US Airways said they were about 20 percent hedged.

 

[mweiss]

WN was hedging while US was in bankruptcy. And you need cash to hedge; WN has plenty while US has little.

Don't get me wrong, hedging can be useful (and, incidentally, can come back to bite you as well). But hedging is like so many other financial instruments. It's much less expensive to do when you're financially stable than when you're not.

Siegel & Co may not be particularly good at running the show, but they also weren't handed a financially healthy company to begin with.

 

[Flying Titan]

This hedging thing is getting to be kinda old. As already pointed out, while in BK protection, U was not allowed to hedge.

After BK, U did hedge somewhat, but you may recall that we were in a very uncertain period of war - a time when the price of oil generally goes up. By historic standards, oil prices were high at the time. There were also bold predictions (anyone seen the WMDs yet?) by the administration that Iraqi oil would flood the market to help offset the cost of our invasion and Iraq's transition to a new democratic form of government. For many, these would be reasons not to hedge heavily as oil prices should have dropped under that scenario.

Clearly, the folks at CCY weren't the only ones thinking this was possible. The industry as a whole hedged less last year than usual. If you want to see some extreme examples, ask the folks at CO and NW what they were thinking.

On a personal level, about a year ago, I was looking at new cars. I seriously thought about going for a car with an eight-cylinder engine. Gas prices were a little high, but didn't seem to be a real concern as I thought they would drop back down as they have done in the past. I'm really glad that I'm driving a six-cylinder model today instead - and am seriously considering buying a hybrid next!

By the way, how much hedging for 2005 would you recommend right now - at today's oil prices???

 

[Fatherknowsbest]

I guess many people need a reminder. We all took sizeable paycuts. With this savings plenty of money was around to hedge fuel. This is the fifth year (by my count) the Company didn't hedge properly. Since you can't hedge in Chapter 11, this means ONE of the five years was beyond their control.


What is the excuse for the other 4 years?

Why do I (we) need to take a NEW paycut to pay for fuel, YET AGAIN?


As an aside, fuel was at a 20 year low in this 5 year cycle. It's not rocket science. It's called GOOD Managemant! Anybody knew to hedge - except people only here for the short term - or looking short term. (Wolf,Gangwal,Siegel)

 

[pitguy]

The 250 million dollars they gave back to the government could have hedged allot of fuel.

 

[mweiss]

At what price? Fuel costs at the time were higher than they had been in a long time. Hedging isn't a magic wand. WN used it at the right time, and there hasn't been a right time since US got out of BK.

 

[Whadayano]

You can't hedge in bankruptcy. In a hedge, you are promising to pay for something (fuel) in the future at a fixed price. No one is willing to trust that the other party to the hedge, already in bankruptcy, will be able to pay in the future. Ergo, you can not hedge.

 

[PITbull]

Once again, the employees are to blame for U's woes. Siegel and his "indispensible" team are not held accountable

Siegel:

Siegel said US Airways has no alternative but to match Southwest's fares on routes they both fly. But the company is in a bind because it is already reporting losses, so without lowering costs, any fare cuts will just increase the losses.

"Last year our average fare was $125. Unfortunately, it cost us $140 to carry that passenger, so every time a passenger got on one of our airplanes last year we were paying them $15," Siegel said in his Webcast.

Labor accounts for the largest share of airline costs, followed by fuel. Siegel told employees US Airways needs new labor agreements this summer to battle Southwest and Frontier in Philadelphia.

Airwise News:

Southwest Airlines, which has been consistently profitable while its larger peers falter, is more than 80 percent hedged this year and has spent less than USD$25 million on 2004 fuel hedges.

Based on current futures prices, the low-cost carrier's savings from hedges would be about USD$240 million this year, Chief Financial Officer Gary Kelly said.

"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 said recently it was 52 percent hedged for the first quarter, while American Airlines and US Airways said they were about 20 percent hedged.

How many times does this have to be said...

USAirways is hedged 30% for 2004 at 87 cents a gallon for jet fuel and 5% hedged for 2005 with a grand total cost of $50 million. Per management presentation. Keep in mind that we, unlike SW, have to pay for fuel "upfront". SW has the luxury of hedging with only a committement and pay as they go along. We, on the extreme end, are at a total disadvantage on the Hedge fuel issue. And I am no defender of management, but there is nothing that U can do to change this type of "credibility" with the vendors on fuel. Period.


Nuff said here.