SWA's Kelly: They "Put The Whole Industry's Future In Question"

The very future of the airline industry is in question. That's the word from Southwest CEO Gary Kelly when the New York Times asked him about the effects of fuel prices.

That's coming from a guy who was, just a month ago, telling reporters that fuel prices don't keep him up at night. And consider: Kelly's airline is well-hedged against rising fuel prices through the end of the year and even beyond.

What makes the news even more disturbing is that industry experts believe rising fuel costs could drive even more carriers over the brink and into bankruptcy. When asked his opinion of the situation, Standard & Poors' Philip Baggaley told the Times, "I guess the best description is grim."

Last year, airline executives, like most of us, believed oil would top out at no more than $25.00 a barrel. Crude is going for more than twice that now on the world market. But even if airlines had seen the dark cloud of $55.00 a barrel oil a year ago, most of them didn't have the cash to hedge against it.

The Times reports such was the case at Delta, which came within a hair's breadth of filing for bankruptcy last year. Only after Delta's pilots agreed to a concession package and the company gave up its fuel hedges for this year did the pall of Chapter 11 pass over the airline. Ironically, giving up those safeguards now mean Delta is again in trouble. Delta is paying more than $1.65 a gallon and could face cash problems if CEO Gerald Grinstein and company can't find a solution before the end of the year.

"The issue is simple: with high fuel costs, we are not on plan," Grinstein said a week ago.

"The airlines must feel they are running a losing race," Baggaley told the Times. "I think there is a real worry that they are running out of places to cut costs. Some of the airlines could run out of cash and see no alternative but bankruptcy."

Already companies like United, ATA and US Airways will have to prove they're ready for the high price of fuel before they can emerge from bankruptcy, according to the Mark Dayton, head of the Air Transportation Stabilization Board.

"Getting out will depend on equity infusions, and fuel prices will affect equity investors," Dayton told the New York paper. "I think the fuel problem is a big element. It is uncontrollable."

FMI: www.airaffair.com/Fuel