For Airlines, War Fuels Panic

It's a different story at most of the other legacy carriers, which generally have half their needs hedged and the other half tied to market conditions.

Northwest (NWAC) is one of the better positioned carriers, with more than 50% of its needs for 2003 hedged at a cap between $24 and $25 a barrel. In its fourth-quarter conference call, the company revealed it was already $80 million in the money due to its fuel hedge position for 2003. Likewise, Delta (DAL) has hedged 63% in the first quarter and about half of its jet fuel needs for 2003. And while Continental (CAL) said it was 95% hedged in the first quarter, that's at a cap of $33 a barrel, which is on the high side.

"Delta's in good shape. Northwest is well hedged. Continental is OK," said Corridore. "I would say that AMR is probably in the worst shape of those guys. They're not well hedged, with just 40% hedged in the first quarter and 32% for the full year. Obviously that's not so great."

At AMR, which recently warned that it may have to seek bankruptcy if it can't control costs, the fuel issue could become part of a wider problem. When taken along with the company's labor woes, sinking demand and inability to slash costs to meet demand, higher fuel only will exacerbate the issue.

"I don't think it will push the company into bankruptcy. I don't think it will be the final indication the company will file Chapter 11. There are so many other factors involved," said Ray Neidl, airline analyst at Blaylock & Partners.

Indeed, but at the bankrupt airlines, United and US Air, rising fuel costs will be an even bigger drag on business. Because of the financial issues that led both to seek Chapter 11, neither carrier hedged fuel costs in 2003, leaving them both exposed to the vagaries of the market. While there's no way to say if a spike in fuel prices would force both into total liquidation, given the current market conditions, none ruled the possibility out.

Can't Fuel Around Hedges could be the key to some airlines' survival
Quarter	Crude Oil, price per barrel	Fuel and Oil Expenses
		AMR	Continental	Southwest
Q1 2000	$25.06	$539 million	$334 million	$197 million
Q2 2000	30.37	567	313	198
Q3 2000	30.38	648	354	195
Q4 2000	27.97	727	392	215
Q1 2001	27.06	707	345	210
Q2 2001	28.21	842	349	208
Q3 2001	22.41	776	322	192
Q4 2001	21.62	563	213	161
Q1 2002	26.21	527	208	170
Q2 2002	26.28	656	254	188
Q3 2002	29.62	697	276	203
Q4 2002	33.07	682	285	200
% increase in 2002	+48.3%	+25.9%	+33.8%	+24.2%
Sources: Company Reports, TSC Research, Baseline

"Certainly, the companies with the strongest financial position will have an easier time hedging costs," said Corridore. "But with the state of the industry, any sudden shock could put someone with a weak balance sheet in bankruptcy."

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