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Oil's descent will help airlines take off
(Chicago Tribune Via Acquire Media NewsEdge) CHICAGO _ U.S. carriers are still paying a high price for fuel months after oil prices plunged, and it's likely to hurt earnings they will announce this month and erode their cash reserves.
But the pain at the pump should be short-lived, with money-losing jet-fuel hedges expiring in a few months. That could lead to an unprecedented windfall for carriers as the full benefit of cheap oil kicks in.
In total, domestic airlines could earn upward of $3.5 billion this year after losing an estimated $4.5 billion in 2008, predicted Vaughn Cordle, a former airline pilot who is chief executive and founder of AirlineForecasts LLC.
Even if oil averages $60 per barrel for the year, well above Monday's close of $37.59, the fuel bill for the nine largest U.S. airlines will drop $20.4 billion from 2008 levels, Cordle estimated.
Carriers first must scrape up cash over the next three months to counteract wrong bets that continue to inflate fuel costs. They also hope a war in the Middle East or some other calamity doesn't trigger another oil spike.
Still, the change of fortune is startling for players such as United Airlines, which appeared headed for another trip to bankruptcy court last summer when fuel peaked at $147 per barrel.
Now, United predicts that by April it will shake off the effects of hedges it put in place at oil's peak, and that it will save about $2.5 billion for the year if fuel prices remain at present levels.
"Obviously, that oil is below $50 (per barrel) is a tremendous boon for airlines," said former Continental Airlines CEO Gordon Bethune. "If at $140 you're dying, you've got a chance at $50."
As in other downturns, airlines are slashing ticket prices to counteract a drop in travel. But analysts think airlines will be able to absorb the lost revenue without amassing heavy losses this time.
Carriers already were cutting capacity and shrinking operations when the credit crisis sent the economy into a tailspin in the fall. That strategy appeared to pay off in December, when most carriers reported fuller planes and surprisingly strong revenue.
"I haven't seen any pricing power before in a recession for this industry," said FTN Midwest Securities analyst Michael Derchin.
A price war led by discount carrier Southwest Airlines following the Christmas rush could send fares tumbling, however. Cordle predicts that lower prices and sluggish consumer spending could cause airline revenue to drop by about 7 percent in 2009.
Even so, U.S. carriers still would be profitable if oil remains at current levels. At Delta Air Lines, passenger revenue would have to fall by 17 percent to offset the $5 billion it would save, excluding the costs of underwater hedges, if fuel averaged $50 per barrel for the year, said Delta President Ed Bastian last month.
Delta expects to undo its bad fuel bets by spring, but not without paying a heavy price for the complex swaps and collars that were supposed to guard against the $200-per-barrel oil predicted by analysts last summer. On Dec. 15, Delta provided its counterparties with $1.1 billion in collateral, according to a Securities and Exchange Commission filing.
United, in an SEC filing last month, warned that it expected to provide $900 million in cash collateral during December, leaving it with just $2 billion in unrestricted cash. United can't yet say if it will face another cash drain during the first quarter of 2009 since collateral-posting requirements are tied to the price of oil, said spokeswoman Jean Medina. But if current prices hold, "hedge collateral will reduce each month going forward."
Southwest Airlines, meanwhile, in December used a complicated series of trades to effectively reduce its fuel hedges to about 10 percent for 2009 through 2013. Had it not done so, Southwest would have been forced to provide $600 million in collateral in addition to the $230 million it had posted as of Dec. 22.
With such fuel-related carnage fresh in mind, it's little wonder that investors are hesitant to plunge into an industry known for producing staggering losses.
"Will they do OK in '09? Yes, they will," Bethune said of U.S. airlines. "But does that mean you should park your pension there? If you're going to buy these equities, pick the right companies."
He advised investors to focus on carriers with strong management teams.
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(c) 2009, Chicago Tribune.
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Copyright ? 2009 Chicago Tribune
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