Airlines that pay for their jet fuel when they fill up their planes have been forking well over $2 a gallon lately - nearly four times the average price they were paying just four years ago.
High fuel prices have dealt a much milder blow to carriers that have used a practice known as fuel hedging, which most often involves purchasing futures contracts that allow airlines to fix or cap the price they'll pay several months or years in advance.
Southwest Airlines Co. has led the pack, followed by Seattle-based Alaska Air Group Inc., the parent company of Alaska Airlines and Horizon Air.
Both companies are bracing to pay market rate for more of their fuel in the coming years after ramping down their hedging programs as persistently high oil prices sent the cost of those futures contracts soaring.
But now, with some experts predicting crude oil could creep up another $10, $20, even $30 a barrel, some airlines are taking cautious steps toward hedging again.
"The idea is to spend some money now to avoid the harm that would happen to our business if fuel went up by a significant amount," said Brad Tilden, Alaska Air's chief financial officer.
Some airlines hedge against jet fuel prices, which have averaged about $2.17 a gallon over the past three months - up from an average of about 55 cents a gallon in 2002, according to Energy Information Administration data on spot prices in three major U.S. markets.
Others base their contracts on the price of crude oil, which has been trading above $70 a barrel since spring, compared to an average of less than $15 a barrel in 1998.
Fuel hedging contracts have gotten proportionately more expensive because they're tied to the price of crude or jet fuel.
Though hedging is speculative by nature, companies view it more like an insurance policy than a risky gamble.
"You're basically buying a level of certainty," said John Heimlich, vice president and chief economist for the Air Transport Association. "The market price may be higher, it may be lower, but I know what I'm going to pay, and I can set my business plan accordingly."
In the last several years, Southwest has reaped sweeter rewards from fuel hedging than any other airline in the industry - nearly $1.8 billion in savings from 1999 to 2005.
Seven years ago, the Dallas-based low-fare carrier set a goal of having most of its projected fuel consumption hedged, said Laura Wright, the company's chief financial officer.
"We sleep better at night if we know what that cost is going to be," Wright said.
Southwest had a whopping 85 percent of its fuel hedged at a rate based on $26 a barrel for crude last year, when oil was often trading at twice that price. That shaved about $892 million off the company's 2005 fuel bill.
It's hedging almost three-quarters of its fuel at roughly half the going rate again this year. Even so, it expects to pay $800 million more on fuel this year than in 2005 because of the rising costs of both fuel and fuel hedging.
Unless oil prices plunge, its savings from advance fuel purchases will shrink in the coming years because it has smaller percentages of its fuel hedged each year through 2010, when it has advance purchases locked in for only 12 percent of its fuel.
One of the most common types of fuel hedging contract is known as a "call option," or "cap," which names the highest price an airline would have to pay for fuel, usually averaged over a future monthly or quarterly period.
Say, for example, oil is trading at $70 a barrel. An airline might pay a $5 premium to protect itself against fuel going past $75 a barrel.
"If fuel prices drop, well, we're out the premium we paid," said Steve Rock, manager of Alaska Air's fuel hedging program. "If prices go above the $75 barrel threshold, we would start getting compensated back for whatever quantity we purchased at that level."
Hedging became difficult, if not impossible, for some airlines during the industry-wide slump that followed the Sept. 11, 2001, terrorist attacks.
Whether companies are hedging fuel, aluminum, coffee beans or Japanese yen, they generally need to have good credit and be in a position to pay some substantial upfront costs. That's been an obstacle for carriers that have had to limp through bankruptcy reorganization.
In early 2004, Delta Air Lines Inc. sold off its hedging contracts ahead of their scheduled settlement dates, in part because its credit rating had been downgraded. Earlier this year, it had to get a bankruptcy court's approval to begin hedging again. The same was true for Northwest Airlines Corp., which is also trying to emerge from bankruptcy.
Fuel hedging has saved Alaska Air more than $250 million in the last four years. Beginning in 2002, it began steadily increasing the amount of fuel it buys in advance, but in mid-2005, it backed off a bit.
It has just under half of its fuel hedged for 2006, and has to pay several dollars more per gallon than Southwest, which lined up its hedging contracts much earlier.
Alaska Air's hedging positions will decline over the next couple years - down to just 13 percent in 2008. But in July, the company said it would begin hedging again for the first time in several months, citing continued uncertainty about oil prices.
New York-based JetBlue, another big hedger in recent years, said in its latest quarterly earnings report it had about two-thirds of its fuel hedged for the first six months of the year, but expects its fuel costs to rise because it's hedging only 40 percent of its fuel needs for the remainder of the year.
Even though fuel hedging has gotten more expensive, Heimlich said he thinks airlines will do more of it in the future because it's proved to be a successful way to manage risk.
One potential downside to hedging is the possibility that a company will get stuck paying above-market prices.
In the decade before Sept. 11, 2001, for example, crude was trading under $20 a barrel globally, and jet fuel cost under 60 cents a gallon.
"If the airlines had been hedged then at 90 cents a gallon, guess what everybody would be writing about? 'Those idiots. I can't believe they're hedging. Fuel is so low. Why would they be so stupid to lock in such high prices?'
"You know what we would do to have 90 cents a gallon right now?" Heimlich said. "I mean, we would give a left and right arm for 90 cents a gallon."
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