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Crude Drop May Hit Airlines Bottom Lines

 June 27, 2012 12:34 PM

(By R. Chandrasekaran) Crude oil price dropping more than 25 percent since February is music to consumers ears, but not to the airline companies, who are the whipping boys because they have hedged their oil requirements. The crude oil fall may obviously hurt the bottom line of such companies that have hedged their oil requirements to manage the volatile oil price. However, there are companies that have not hedged their oil requirements and could benefit from the falling crude price.

Delta Airlines (NYSE: DAL) had already announced that it will suffer a loss of $155 million in the June quarter on hedging. This is in contrast to the $151 million it recorded on mark-to-market gains from fuel hedging during the first quarter.

[Related -Delta Air Lines, Inc. (NYSE: DAL): Can Airlines Continue Capacity Cuts To Improve Yields?]

The crude oil price has dropped to less than $80 per barrel from a peak of $110 during the first quarter.  This has not only surprised market but could also inflict losses on airliners that hedged their oil requirements.

Though low cost, air carrier Southwest Airlines (NYSE: LUV) had used to hedge their oil requirements, they seemed to have not hedged during the first half of 2012 anticipating a fall in crude price. This could probably save the company from suffering loss due to hedging in the June quarter. However, the company's bottom line was hit during the first quarter for failing to hedge.

[Related -Why I'm Eyeing Airline Stocks]

During the earnings release, Southwest Airlines had indicated that its operating income dropped hurt by a $478 million jump in fuel costs over 2011 first quarter. The company has hedged its oil requirements only for the second half of 2012. Now that crude is trading lower, there is a possibility of the company revisiting its hedging.

Unlike Delta, United Continental Holdings (NYSE: UAL) is also likely to escape with a milder loss. During the first quarter, United Continental suffered loss partly due to 21 percent surge in fuel costs. Due the cooling of crude's price in the second quarter UAL's performance may look better than expected, unless the company suffers setbacks from other fronts.

The crude oil futures price could play a spoil sport for airliners given robust business travel and expansion of airliner companies. Strong consumer demand, increased load factor and average revenue per seat mile are likely to contribute to the airliners' performance.

As far as U.S. Airways (NYSE: LCC) is concerned, the company seems to have not hedged oil and the lower crude is likely to benefit the company's bottom line.

Interestingly, International Air Transport Association had earlier maintained its worldwide profit outlook of $3 billion driven by robust growth in passenger traffic apart from bottoming out of freight rates. However, the cloud of European debt crisis is hanging over the sector though the IATA had taken into consideration the impact. If the crisis deepens, the calculations might go awry.



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