Airlines: Hedging Their Bets

Oil prices famously affect airlines financial performance. Now, in the wake of last years sky-high oil prices, the jet-fuel bill has become all that separates airline winners from losers.

Take Southwest: Today it reported fourth-quarter net income of $111 million. But it made $246 million from hedging the cost of jet fuel. Translation: Southwest would have been in the red without savvy fuel-hedging.

Or take Delta Air Lines, which also reported fourth-quarter results, posting a $70 million net loss.

Guess which airline paid $1.87 a gallon for fuel during the quarter, and which paid an average of $2.61.

Flying high? (Delta)

That differential in airlines hedging success is likely to continue through this year. Southwest says it is has hedges in place for just over 70% of its expected fuel use this year at about $2.00 a gallon. Delta says it has only about 20% of its 2008 fuel bill hedgedand those options allow a maximum price of between $2.69 and $2.77 a gallon. For the full year, Delta expects fuel costs in 2008 to average $2.67 a gallon.

What happens beyond 2008 is cloudy. In recent years, fuel has overtaken personnel as the main cost center for major airlinesespecially those that have restructured. At Delta, fuel burned about 29% of fourth-quarter spending. Or, measured another way, 4 cents of every 10.79 cents that Delta spent to put a seat in the air was just to pay for fuel.

Delta argues in its fourth-quarter report that, excluding fuel costs, its flying high. It says its core seat-mile cost which doesnt count fuel costs is 6.79 cents. Thats roughly in-line with Southwests (6.57 cents).

Delta says it highlights the figure that excludes fuel costs because management believes high fuel prices mask the progress achieved toward its business plan targets. And if a frog had wings