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."