Isaac Newton taught us that what goes up must come down. When that "what" is an airplane we can only hope that the up and down go smoothly. For the most part it appears the airlines have figured out how to manage the ascent and descent of their planes. Where they seem to be having a bit more trouble is in managing their fuel costs.
With oil cruising comfortably in triple digits last year appearing set to climb to $200/bbl the airlines put on fuel hedges that are acting like overweight baggage on their bottom lines.
Delta Air Lines (NYSE: ) booked a loss on their fuel hedges in 2Q09 of $390MM pushing the full company earnings in the red by $257MM. AMR, American Airlines’ parent company, saw its overall fuel bill fall by $1.8BN in the first half of this year which was a combination of a 35% reduction in the price per gallon as well as 8.3% lower usage. The only turbulence was caused by a $465MM loss on 1H09 fuel hedges.
If the motto for the airline industry as a whole is "safety first" it would appear the finance departments of the various airlines have fastened their seat belts and hedged much less aggressively this year. UAL, parent of United Airlines has hedged only 8% of its 2010 expected fuel needs, while Delta put price protection on 9% and JetBlue 10%.
Going way out on the wing Continental (NYSE: ) has put no hedges on for next year’s fuel needs as 1H09 hedges cost the company roughly $0.42/gallon, totaling $350MM.
Southwest (NYSE: ) is flying in the completely opposite direction and has already hedged about 47% of its planned 2010 fuel purchases. Additionally it has pledged $425MM in cash as collateral on hedges it has stretching as far into the future as 2013.
LUV is in a bit of an enviable position as it is one of the few airlines that has the cash to park in hedges and one of the few airlines to post a profit in 2Q09 adding $0.07/shr or $54MM to its bottom line.
UAL was the other profitable airline in the 2nd quarter but the $0.19/shr or $28MM number was based on one-time gains.
In order of appearance: DAL’s equity hit its low in early March ($3.93) and its high ($8.11) just about a month later. The stock has traded in the middle of that range since. The CDS market had been rising for most of the year hitting its peak of 3597bps in late June and staying at the level for a good part of July. A recent move down to the 2851bps level has been matched by a rising stock price.
AMR’s CDS/equity relationship has been fairly active with the two price streams crossing each other every six weeks or so as CDS levels move up and then down and the negatively correlated stock does the opposite. The latest peak in AMR’s CDS levels seen during July (4350bps) have come down somewhat, 4073bps as of last nights close while the stock started gaining altitude faster than the CDS was falling with a $3.95 close on June 24th and a $5.31 close last night.
CAL’s CDS/equity relationship mirrors AMR’s closely with the stock rising off of late June lows while the CDS stalled at levels near their highs for the year before falling more recently.
LUV has been the best performer so far this year closing at its highs for the year last night ($8.36) while the CDS is again approaching the low tick (155bps; 6/2/2009) closing at 184bps last night.
Enjoy the week.
Jim Delaney
