Airlines renew call for rules on oil speculators

CHICAGO Fri Jun 19, 2009 3:02pm EDT

CHICAGO (Reuters) - U.S. airlines, fed up with volatility in oil prices, are renewing pressure on the government to curb market speculation.

Oil prices, up 115 percent from a January low, directly influence jet fuel prices. Surging oil prices can be catastrophic for an industry that seems always on the brink of financial meltdown.

The stakes are especially high for airlines with the economy mired in a deep recession and travel demand off sharply.

"A repeat of last summer's astronomical crude-oil prices will bring the nation's economic recovery to a painful halt," said Glenn Tilton, chairman of the Air Transport Association (ATA), in a June 11 letter to President Barack Obama. Tilton is also chief executive of United Airlines parent UAL Corp UAUA.O.

"Businesses that spend billions of dollars on fuel each year, already dealing with the impacts of decreased consumer spending, are especially vulnerable," Tilton said in the letter.

Airlines complained loudly about oil market speculation last year as prices raced to a record high near $150 a barrel.

Speculators profit from buying and selling a commodity by predicting future price movements. They provide needed market liquidity, but they also can dramatically influence prices.

It was speculators -- not simple supply and demand -- that led to last year's oil price rally, airline executives say. Others have argued that the connection between investment flows and oil prices is ambiguous.

Soaring oil prices pummeled businesses and consumers last year and helped tip the economy into recession. Airlines, which often list fuel as their highest cost, were hit especially hard.

Despite the insistence of executives in many sectors, the George W. Bush administration resisted calls for added supervision in the commodity markets. Airline heads and leaders of other oil-dependent industries hope the Obama administration will do more.

The White House reiterated its concern about oil speculation on Thursday. But the issue of excessive commodity speculation was not addressed in Obama's proposed overhaul of financial regulations this week.

As oil prices creep higher, however -- above $70 a barrel on Friday -- airline calls for regulation are increasing.

"Of course, I'm nervous all the time about what could happen to oil," US Airways Group LCC.N President Scott Kirby told an investor conference last week. "We saw it run last year, for no fundamental reasons that I could see, up to $147 a barrel."

"The fundamental supply and demand just certainly don't seem to justify where it is today," Kirby said.

VOLATILITY CUTS BOTH WAYS

In the first half of 2008, every major airline suffered from high fuel bills. Some industry leaders called for mergers to offset those costs, but only Delta Air Lines (DAL.N) and Northwest Airlines actually merged.

In lieu of widespread consolidation, airlines downsized to cut capacity and costs. The downsizing continued into 2009. Delta and AMR Corp AMR.N, parent of American Airlines, announced new capacity cuts as recently as last week.

As airlines cheered a stunning 70 percent decline in oil prices in the second half of 2008, their demands for new energy market regulations died down.

But the surprising drop in the oil price caused airlines' fuel hedge portfolios to lose value. Carriers like UAL, Southwest Airlines (LUV.N) and US Airways Group LCC.N, posted hefty quarterly charges for that reason.

UAL suffered the most. Last year, the company wrote off $249 million in cash hedge losses. In the first quarter of 2009, its cash loss for hedges was $323 million.

Aside from the downsizing of 2008 and 2009, airlines are in no better position now than they were a year ago to weather an oil price spike, said airline analyst Robert Mann. Cash positions continue to deteriorate and revenue is weak, he said.

Airlines must not wait for government relief; they should do a better job hedging their fuel exposure, Mann said.

"They should be concerned about volatility, but the question is, should they be managing it themselves as opposed to complaining about the cause?" Mann said. "We could certainly speculate on who's speculating, but ultimately it's an airline business decision."

(Reporting by Kyle Peterson, additional reporting by John Crawley; editing by Matthew Lewis)