Wed, Oct 29, 2008
But Most Will Still Save Cash Despite Losses
Attempts to use hedges to control
costs have put airline executives in the odd situation of having to
explain to stockholders why a stunning decline in oil prices has
produced millions in losses.
Reuters reports some airlines have hedges which will result in
paying above-market prices for their fuel.
For years, Southwest Airlines has been admired for using fuel
hedges to create a major cost advantage over rivals. But in the
latest quarter, the airline wrote down 247-million dollars in
accounting losses when dropping fuel prices made the hedges less
valuable. Industry-wide, losses due to hedges totalled over
Still, industry observers say you'd really have to be a
glass-half-empty type to cry over hedging losses. The money which
will be saved by the airlines through the lower fuel costs is
expected to dwarf the accounting losses.
Consultant Robert Mann notes, "If you had the choice, you'd take
the noncash charge. Obviously, the lower fuel prices are a big
Despite a rare losing quarter blamed on hedges, Southwest CEO
Gary Kelly says hedges will continue to play a role at his company.
"Right now... prices have no bottom... we can't be oblivious to
that," he said. "At some point, we'll want to adjust our strategy
and continue to be adequately hedged into the future."
Those sentiments were echoed by United Airlines CEO Glenn
"While oil prices are lower in recent weeks, they continue to be
volatile," Tilton told employees last week. "That said, the
convergence of falling oil prices with our capacity flexibility,
strong improvement on costs and competitive revenue put us in a
position to make our margin and return United to
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