Bolling: Airlines Are Not Safe at Any Price

Disastrously poor oil hedging everywhere but Southwest has made this sector one to avoid, even after the selloff in oil.
By Eric Bolling ,

We all watched the big $5 move down in crude oil today. I know what you are thinking: "Airlines, they have to bounce right?" and I have to admit the thought crossed my mind as well.

I have been looking for a sell-off in oil for about $15 to $20 now. Five from the high is an interesting move, but to be accurate, I would call it amusing. That's because there are a few things that have to happen before the inevitable real correction in oil takes place.

I have seen these traps before. They are very similar. It starts with a move up on bullish news, and the early morning sees all bids. As the trading day progresses, sellers test the water. Yesterday, for the first time in a while, the bulls seemed to tire after three or four attempts to prop up the growing heaviness in oil. After all, the other news of the day wasn't bullish at all.

In fact, some of it was rather bearish. For the first time in six years (according to AAA), we American gasoline junkies curtailed our driving on the vehicular-ly beloved Memorial Day weekend. The number of miles driven in March retreated for the first time (year-over-year) in 28 years or so. The interesting thing is that the March numbers showed a not-so-innocuous 4.3% drop in miles driven to and from

Costco

(COST) - Get Report

(one way to counter a ridiculously elevated price at the pump).

Back to yesterday, I was thinking of whether or not the airlines were in a position to bounce. After all, the group has been beaten senseless for its inability to manage one of the most basic business tenets going: manage your costs and the rest will follow.

I have spoken to, interviewed, and had cocktails with several CEOs and top management of major and mid-level airlines. They all seem to think that oil can't go any higher. At $50, it was a top. At $100, it was crazy. I actually had an argument with a consultant to some major airlines. He and I were arguing the virtues of hedging. He was in the ill-advised camp that at $80, hedging forward would be "crazy." They would lose too much on the hedge if oil prices went down.

I offered him a tutorial on hedging -- one that I would give to airline executives as well, if they asked. The tutorial would start with teaching these guys that once their hedge was in place, their biggest expense (jet fuel) would no longer be a surprise. They could then get to the business of pricing their one simple, not too complicated product (a ticket) properly.

What's the risk?

If they raise prices too high, people fly another airline. Then they pack like sardines into one of the other guys' 30-year-old aluminum fuel guzzling tubes and get treated like cattle to the slaughter house? Then that airline goes belly up because they flew too many passengers at a loss. They never hedged their fuel properly.

I know, I am beating up on the poor airlines. I am sorry. I know a lot of good people work in the industry. It's just that not many upper level management types know diddley about economics. They are probably wildly smart engineers (I sure hope so, the new Dreamliner can hold something like 550 passengers, their bags... the crew... some parcel business....and possibly a body or two).

They all could take a lesson from the one guy who gets it: Herb Kelleher. Herb started

Southwest

(LUV) - Get Report

some 36 years ago. Southwest has mastered the airline hedge. They were and are the only big airline that has managed fuel costs. And its stock has benefited from that.

Many airline stocks have sold off big time.

AMR

(AMR)

is down 88% from last year, while

UAL

(UAUA)

is down 84%, and

Delta

(DAL) - Get Report

is off 73% from last year.

Continental Airlines

(CAL) - Get Report

is 73% lower. Southwest, down just 25% from last year, has far exceeded the performance of its peers.

The only fly in Southwestʼs ointment is that Herb has stepped down from the board. I can only hope he remains an influence in Southwest's most prized possession: that hedging program.

Better yet, maybe Herb and I can start a consulting business. There are so many companies in need of an oil price hedge that our phone would be ringing constantly....that is unless the truckers, shippers, food processors, power providers, airlines, rails, and countless others think -- like my consultant buddy -- that they know where oil (or anything else that trades) is headed.

Bottom line: the airlines are a fun and convenient way to travel, but a terrible way to invest. Stay out! If you are in, get out on the bounce that an oil correction may provide.. Until they, along with the other energy sensitive sectors, start to hedge fuel properly, I find few investment ideas. (Whatʼs not energy sensitive? -- funny it took $135 oil to realize how energy sensitive everything is).

As always, "trade with your head, not over it"

At time of publication, Bolling had no positions in stocks mentioned, although holdings can change at any time.

Eric Bolling is a host on the new Fox Business Network. Bolling was one of the developers and original panelists (nicknamed "The Admiral") on CNBC's "Fast Money."

Bolling is an active trader specializing in commodities, resource trades and ETFs.

Bolling is a member of several exchanges including The New York Mercantile Exchange (NMX), The Intercontinental Exchange (ICE) and The Commodity Exchange of New York.

After spending 5 years on the Board of Directors at the NYMEX, he became a strategic adviser to that Board of Directors where he assisted in bringing the company (NMX) public. He has been included in Trader Monthly Top 100 in 2005 and 2006. Bolling was the recipient of the Maybach Man of the Year Award in 2007 for his contribution of philanthropy and willingness to de-mystify investing to Main Street.

Bolling graduated from Rollins College in Winter Park, Florida and was awarded a fellowship to Duke University. Bolling was an accomplished baseball player. He was drafted by the Pittsburgh Pirates where he played before his career was cut short due to injuries. He honors his baseball past by sporting the NYMEX trader badge, R.B.I.

Loading ...