Losing BigAll told, the surge in the crack spread, combined with high crude prices, will leave the 12 biggest U.S. airlines paying $9.6 billion more for all of 2005 than they did in 2004, Cordle estimates. Full-year losses will be staggering.
Delta ( DALRQ) alone expects to lose $2.16 billion this year, excluding special items. Soaring fuel costs pushed Delta, the nation's third-largest airline, into bankruptcy protection last month. For the 12 largest airlines, Cordle expects 2005 losses to total $5.2 billion.To get a sense of just how damaging petroleum costs have been to the sector, Cordle points out that if the 12 biggest airlines were to pay the same fuel costs in 2005 as they averaged from 1990 through 2000, they would have a pretax profit for the year of $12.7 billion. Of course, had oil remained cheap, the airlines probably wouldn't have been able to wrangle the $10 billion worth of labor concessions they got in recent years, sometimes using the threat of bankruptcy or liquidation. But even excluding labor savings, the 12 largest airlines would have ended up with $2.7 billion of profit if fuel had remained at last decade's levels. Alaska Air Group ( ALK), Continental, JetBlue Airways ( JBLU) and Southwest Airlines ( LUV) reported third-quarter profits last week. With the exception of Continental, they all benefited from hedging programs that use financial derivatives to cap the crude-oil price of some portion of their fuel needs. Still, Continental and JetBlue said fuel costs will cause them to report fourth-quarter losses. And JetBlue, a young, low-cost carrier that's been profitable for 19 quarters in a row, said its fourth-quarter loss will be enough to wipe out its profits in the first three quarters of the year. That prompted Standard & Poor's to lower JetBlue's corporate credit rating to B-plus from BB-minus. Fuel hedging had helped Alaska and Southwest weather tough times. However, the hedges only apply to crude oil and don't cover the added cost of a wider crack spread. There is no futures market for jet kerosene, but Southwest executives said last week they have added an additional layer of protection by hedging heating oil and gasoline. How effective those hedges will be remains to be seen, as the crack spread for jet fuel remains well above the additional cost of refining the two other products.