Delta's Woes Worsen While Southwest Successfully Hedges

Perhaps it's a story about the benefits of planning ahead. Perhaps it's a story about keeping your eye on the ball. But this is the story of two airlines -- Delta and Southwest -- and how they're dealing with the seemingly endless increase in fuel prices.

Delta Says Fare Hikes Won't Make Up For Rising Fuel Costs

"We made a decision some months ago that Chapter 11 was not where we wanted to go," said Delta CEO Gerald Grinstein, speaking at an Goldman Sachs investor conference in New York. He was quoted by the Atlanta Journal-Constitution. "The problem with Chapter 11 is 140 airlines have gone into Chapter 11 and only two... have emerged."

But Grinstein is getting absolutely no help in the form of fuel prices. In fact, they continue to rise, forcing Delta, United and other carriers to push through a fare hike that might -- just might -- stick this time. The fare hikes, coming on the heels of Delta's much-vaunted fare restructuring, amount to about $50 round-trip.

But almost anything Grinstein and company do pales in comparison to the expected fuel cost hikes. The Delta CEO said he expects to pay between $900 and $1 billion more for fuel this year than last.

"We have got to get additional cuts," he told the Goldman Sachs crowd.

Now, Delta is looking for more ways to save money. That could include selling off assets, although Grinstein is sticking to his prediction for an eight-percent increase in capacity this year. An asset sale could see Delta divesting itself of its regional carriers -- Comair and ASA. As well, the airline plans to retire two dozen of its oldest aircraft before the end of 2005.

The Sun Shines On Southwest

While a dark cloud appears to be following Grinstein around these days, threatening to shower him in a downpour of red ink, the sun seems to be brightly shining on his counterpart at Southwest Airlines.

"What's to stay up at night about other than just to be so excited about my life?" asked Southwest CEO Gary Kelly, in a recent interview with the London Financial Times. "A friend asked me, how do you like your job and do you worry about $55 crude oil, and I just don't think there is anything to be gained by worrying about it."

No, even though Kelly lives in Texas, he doesn't have an oil well in his back yard. Instead, he has an aggressive cost-management policy in place for at least the rest of the year. It's called "hedging."

MyWiseOwl.com defines hedging this way:

A hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. The term is a shortened form of "hedging your bets", a gambling term. Typical hedgers purchase a security that the investor thinks will increase in value, and combine this with a "short sell" of a related security or securities in case the market as a whole goes down in value.

While most legacy carriers decided fuel prices were going down last year, Southwest decided otherwise. It bought fuel at $32/barrel -- enough of it to cover about two-thirds of its expected fuel needs in 2005. SWA hedged another 25-percent of its fuel needs through 2009 at $29/barrel.

That turned out to be a wise investment. Oil now is trading at around $57/barrel. Do the math.

But as wise as it was, Southwest's move was based on experience. In 1999, Finance Director Laura Wright said Southwest was caught flat-footed when fuel prices suddenly shot up. "We wanted to be more disciplined," she told the Financial Times." It was not about predicting what would happen to prices, it was just cost control."

FMI: www.delta.com, www.southwest.com