U.S. airlines hedge less, let fuel exposure grow

CHICAGO/NEW YORK (Reuters) - U.S. airlines, battered by stratospheric fuel prices, are even more vulnerable to oil spikes now than they were a year ago as most have let their hedge positions erode.

All major U.S. airlines, with the exception of AMR Corp's (AMR.N) American Airlines, are facing record high oil prices with less hedging protection than they had a year ago. The lack of fuel hedges increases the risks for the already volatile industry.

"It seems like the airlines never learn, but they're always in such a state of turmoil that it's difficult for them to plan (for the long term)," said Bill Hochmuth, an analyst with Thrivent Asset Management.

Fuel hedges can protect companies from price swings by locking in rates. Without these insurance policies, airlines pay market rates for their fuel, which is good when prices fall but bad when they rise.

The price of crude oil CLc1, which directly affects the cost of jet fuel, rose to a record high above $110 a barrel on Thursday and is up nearly 70 percent over the last year. The price of jet fuel JET-USG, which vies with labor as an airline's biggest cost, has risen about 75 percent.

If current prices hold, the U.S. airline industry would pay nearly $20 billion more for fuel this year, according to data from the Air Transport Association.

Higher fares have helped offset some of the surge in fuel costs. But ticket prices -- which are 8 percent to 14 percent higher in major US markets than a year ago, according to fare tracker FareCompare.com -- have not kept pace, and some say the situation is becoming dire.

"We're really at a point where fuel alone -- setting aside the revenue impact of a U.S. recession -- will drive full-year losses for all of the legacy carriers," said Bill Warlick, airline analyst at Fitch Ratings.

MORE VULNERABLE

Government filings show that most major airlines have left themselves more exposed to high oil prices than they were a year ago.

United Airlines, a unit of UAL Corp (UAUA.O), had hedged 15 percent of its first-quarter fuel needs as of January 21. That compares with a 33 percent hedge for the year-ago quarter as of January 22, 2006.

Continental Airlines (CAL.N) has hedged 20 percent of its first quarter fuel needs as of December 31. On the same day the previous year, it was 30 percent hedged for the first quarter.

Delta Air Lines (DAL.N) was 26 percent hedged for the first quarter as of January 22. For the same period a year ago, Delta had hedged 52 percent of its fuel needs as of February 12.

Northwest Airlines NWA.N had hedged 18 percent of its estimated 2008 jet fuel needs as of February 29. It was 40 percent hedged for 2007 as of February 28, 2007.

Even, Southwest Airlines (LUV.N), the industry's leading fuel hedger and also the most consistently profitable U.S. airline, faces eroding protection. As of mid-January, it was about 75 percent hedged for the first quarter, while in the same quarter last year it was nearly 100 percent hedged.

"If prices keep going higher, hedging becomes a harder decision because there's less room to go higher, perhaps," said Beth Harbin, a spokeswoman for Southwest.

While it's easy to point to missed opportunities in hindsight, airlines, like many others, did not expect the recent merciless run-up in oil prices.

"This latest price surge has U.S. airline executives baffled," Joe Schwieterman, transportation expert at DePaul University. "There's no feasible way to fend off the red ink. This is going to give a whole new reason to more aggressively hedge."

RARE EXCEPTION

One exception to lower jet fuel hedges is American Airlines. On January 16, the world's largest carrier said it had hedged 24 percent of its estimated fuel needs for 2008. As of December 31, 2006, the company had hedged was just 14 percent of its anticipated 2007 fuel needs.

American Airlines said it has been rebuilding its fuel hedging program over the past couple years as it recovered from steep losses and typically hedges about 30 percent of its fuel needs.

Airlines typically layer in hedges over the course of the year, so the total percentage of annual fuel consumption hedged may grow by year end.

American's fuel hedging program "is not designed to try to speculate on the price of oil/fuel," spokesman Andy Backover said. "The purpose is to dampen the volatility of fuel prices."

(Editing by Steve Orlofsky)