High Oil Prices Ground Airline Recovery

Even Southwest, which prides itself on its aggressive fuel-hedging program, hasn't been immune from high oil prices. The airline said its fourth-quarter earnings declined 15.2% because of higher energy costs.

Airlines say they're doing what they can to limit the damage. Southwest is close to outfitting all of its 737 jets with fuel-efficient winglets, said Laura Wright, the company's chief financial officer, at a J.P. Morgan investor conference Thursday. Continental has been putting winglets on its planes, too, and continues conservation efforts such as "tankering," in which it loads more fuel than necessary on planes leaving cities where jet fuel costs less, said Jeff Misner, its CFO, at the same conference.

Southwest's recent earnings outperformance vs. the industry has been partly due to fuel hedges it locked in before oil's spike last year, though the carrier's overall cost structure remains the envy of many rivals. Southwest has 85% of its fuel needs for this year hedged at a crude oil price of $26 a barrel. It also has 65% of next year's needs hedged at $32 a barrel and more than 45% of 2007's at $31 a barrel. Smaller hedges on a percentage basis stretch out through 2009.

Even so, Southwest expects its average jet fuel cost per gallon to be higher this quarter than the fourth quarter's 89 cents.

JetBlue also benefited last year from a significant hedging program, but it has hedged a smaller percentage of its 2005 needs -- 21% to 22% at $29.95 a barrel -- and has no hedges in place for 2006. John Owen, the company's CFO, said the airline is not inclined to take advantage of current hedging opportunities, which would allow it to lock in prices only in the mid-$40-a-barrel range. "We'll keep watching," he said at a Citigroup Smith Barney investment conference in Las Vegas Wednesday.