Airline hedging and the future of the industry

I asked here and here why airlines haven’t hedged oil prices.  Today’s W$J notes:

Hedges also cost money, like any insurance. Some cash-strapped carriers, like Delta Air Lines, have sold their hedges to raise money. Other U.S. carriers, including Continental Airlines, Northwest Airlines and US Airways Group, are opting to forgo hedges and pay market prices for fuel this year. Profitable, low-cost carrier Southwest Airlines still hedges aggressively, however.

And, of course, as pointed out in my last post on this issue, “much of the industry is operating in bankruptcy.” Companies on the brink use their money to survive, not grow and thrive. 

Meanwhile, another story in today's W$J notes that Southwest has been “shoring up . . . market position in weaker competitors' markets, aggressively expanding Southwest's range with new routes and service in cities such as Chicago, Pittsburgh and Philadelphia.” 

Southwest is not protected against every state of the world.  Apparently its hedges start to backfire if oil prices move below $35, and because hedges are getting more expensive it's only partly protected against price rises. 

But the key is that Southwest seems better protected than its rivals. So unless Southwest is mismanaged, the weak will get weaker and the strong will get stronger.  The process will unwind in a long death spiral until some of the competitors are allowed to fail. 

Now that US Air seems closer to a merger with America West (remember when it wasn't allowed to merge with United?), and United is having union problems, I would bet on United being the first to go.  Hopefully it will happen sooner rather than later, and a strike could be the straw.  The unions may be betting that the government won't allow United to fail.    I hope they're wrong, and that somebody sees that this long deathbed scene is helping no one.

Comments

[Robert Schwartz]

I am not going to bet against either USAir or United. If America Wewst gets to run USAir, they can run it well enough for it to survive.

United has an asset in its overseas routes that will allow it to survive, if it can cut enough domestic losers.