Lynne Kiesling
Through Fey Accompli I found Peridot Capital, who had a post yesterday on fuel costs that hits some of the same themes as I mentioned earlier this morning.
Amazingly, American Airlines has hedged only 15% of its fuel costs for the first quarter of 2005. With oil futures hitting a record $57 per barrel this week, that could be disasterous for the company's bottom line. To make matters worse, hedging beyond March was recently characterized as "minimal" by American's CEO. He added that total fuel expense for 2005 could hit $5 billion in 2005, if prices remain high. American is only expected to have $19 billion in revenue this year, so 26% of that is paying for gasoline.If oil keeps rising, it's hard to see how this industry can avoid having more well-known carriers headed back to bankruptcy court.
It increasingly looks like the debt levels of the airlines relative to their cash flows are a binding constraint on their hedging.
Or, it could be plain denial (pun intended). GM has similar problems.
http://peakoiloptimist.blogspot.com/2005/03/gm-commits-hara-kiri.html
Poking around a bit, there may be good reasons for the airline industry to avoid hedging. For one thing, it only makes sense to hedge if you know your revenues far in advance, something the passenger airlines don't. However, FedEx and the other commercial freight carriers do know this and are very active hedgers. Here's an interesting presentation on the subject:
http://www.spec2000.com/presentations/heimlich-eBiz2004.pdf