US Airways CEO: Fuel Hedging for the Birds

TEMPE, Ariz. TheStreet) -- Airlines could be poised to benefit from the current economy, and US Airways (LCC) could be the carrier that sees the most upside.

US Airways is the only major airline that does not hedge fuel, a wise policy when fuel prices are falling. "We've thought for a long time that hedges are ineffective," said CEO Doug Parker, in an interview with TheStreet. "Hedges are very expensive and it's hard to purchase enough to be truly hedged."

US Airways CEO Doug Parker

The economy provides a natural fuel hedge, because in a weak economy, fuel prices decline, Parker said.

CFO Derek Kerr said he was pleased Monday night to receive "a text with the number seven in it" from a member of the airline's finance team, signifying that oil prices had fallen below $80 a barrel.

"We have fuel down while demand has stayed strong," Kerr said Tuesday. "It's a good day for us." Both Parker and Kerr said that still, oil prices remain at relatively high levels; since Monday, prices have drifted back above $80.

US Airways ceased hedging in August 2008, concerned about cash collateral requirements required from declines. Even so, as the carrier unwound its hedge positions, it reported a $234 million hedging loss in the fourth quarter of 2008.

Travel demand remains strong as far as US Airways can see, despite the precipitous swings in the stock market, Parker said. "We are trying to [determine] exactly what all this means," Parker said. "The stock market is concerned about another recession, but we have no indication that is the case."

He reminded that over the past year, airlines have seen booking patterns change, with passengers far more likely to book closer to their travel dates than they had previously. As a result, airlines have less visibility into the future of travelers' behavior.

Airline shares have performed particularly poorly this year. In mid-morning trading Thursday, with the S&P 500 Index down about 9%, the Amex Airline Index (XAL) was down about 34% and US Airways was down about 47%. The brightest spot in the industry was Alaska (ALK), currently Wall Street's favorite airline, down just 7 %.

In a recent report, Soleil Securities analyst James Higgins raised US Airways to a buy with a $9 target price. He said that the recent fuel price drop could increase pre-tax profit by 70 cents a share. "Yet, while jet fuel prices have fallen by nearly 10% since the beginning of August, LCC shares are down 7% as economic concerns swamped the lower costs," Higgins wrote.

Another unrecognized plus for US Airways is changes in Southwest's (LUV) schedule, including a pullout from the Philadelphia-Pittsburgh flights, a route now served solely by US Airways. Beginning in the first quarter of 2012, Southwest will reduce its capacity in Philadelphia by about 13%, Higgins said, noting "that dynamic alone should substantially improve LCC's competitive landscape."

Also, Higgins said, a slot swap with Delta (DAL) will lead to a stronger position at Washington Reagan National and should add at least $75 million in annual revenue starting in 2012.

Every dollar-a-barrel variation in the price of oil has an impact of $34 million on US Airways.

-- Written by Ted Reed in Tempe, Ariz.

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