Hedging Fuel Costs a Plus for Airlines
Financial reports from three U.S. airlines Thursday appeared to deliver a message for air carriers in this era of high jet fuel prices: Hedge your bets.
Southwest Airlines Co., which reported that its quarterly profit almost doubled, said a big bet on jet fuel hedges would help it keep outperforming the rest of a loss-plagued industry next year. Alaska Air Group Inc., parent of Alaska Airlines, also reported better-than-forecast earnings Thursday. Like Southwest, it benefited from fuel hedges.
But JetBlue Airways Corp. said earnings sank by two-thirds and warned that fuel costs would drive it into the red.
JetBlue, second to Southwest by market value, said energy prices would send its fourth-quarter and probably its full-year results into the minus column, breaking a profit run since it went public in April 2002.
“It certainly shows what happens when you’re exposed to fuel,” Fulcrum Global Partners analyst Susan Donofrio said of JetBlue. “They’re a victim of circumstance right now.”
Dallas-based Southwest said its hedging policy -- the practice of buying contracts that lock in jet fuel at certain prices -- resulted in a $295-million benefit in the quarter. Hedge contracts limited the increase in its per-gallon cost of fuel to 18% even as the average price of jet fuel climbed 51% from the same quarter a year ago.
Southwest said third-quarter net income rose to $227 million, or 28 cents a share, from $119 million, or 15 cents, a year earlier.
Even stripping out $87 million in one-time gains, the results beat Wall Street analysts’ forecasts.
Although hedging was a big factor, the low-cost carrier’s performance was strong in other areas too, helped by improving results in cities where the airline is expanding, including Philadelphia, Pittsburgh and Chicago.
Even as most traditional U.S. airlines -- including Delta Air Lines Inc. and Northwest Airlines Corp., both of which recently filed for bankruptcy protection -- have said they plan to cut available seats to cut excess capacity, Southwest said it would expand aggressively.
The airline said it expected to take delivery of 33 new Boeing 737-700 aircraft next year.
Alaska Air’s third-quarter earnings rose to $90.2 million from $74 million. Per-share earnings were $2.71, beating a $2.12-per-share forecast from Reuters Estimates.
JetBlue said third-quarter profit fell to $2.7 million, or 2 cents a share, from $8.1 million, or 7 cents, a year earlier.
JetBlue Chief Executive David Neeleman said in a conference call that the airline planned to keep expanding, taking delivery on 16 Airbus A320 and 18 Embraer 190 jets next year.
But he said JetBlue might look at reducing flights to some destinations and use the spare capacity to serve new cities.
Southwest shares fell 51 cents to $15.07. JetBlue lost $1.49 to $18.05 and Alaska Air slipped 16 cents to $29.34.
