High Oil Prices Ground Airline Recovery

Larger airlines have used fuel hedges in the past but didn't have them in place to avoid last year's fuel price run-up. Early last year, cash-strapped Delta sold its fuel hedges to raise $83 million. Before the Sept. 11 terrorist attacks, American Airlines had a significant fuel-hedging program, with up to 50% of its needs hedged up to two years into the future, said Gerard Arpey, AMR's CEO, at Thursday's J.P. Morgan conference. But in the travel slump that followed the attacks, the airline's creditworthiness declined, making it hard to find counterparties for hedging trades, he said.

The airline is trying to go back to hedging and has hedged about 15% of its first-quarter needs in the low-$40-a-barrel range, Arpey said.

But some analysts argue investors shouldn't pick stocks just by looking at airlines' fuel security. Low-cost carriers are trading with high multiples.

J.P. Morgan's Baker has underweight ratings on low-cost carriers AirTran (AAI Quote), JetBlue and Southwest, "as we believe these carriers are still largely priced for perfection despite deteriorating profits and narrowing cost advantage."