American Airlines’ 2005 Fuel Costs: $5 Billion

The ineptitude of the major domestic airlines continues to amaze me. There are some things these companies cannot control; their unions, for example. However, the management teams of United, American, Delta, and US Air are most to blame for extremely poor operations, and as a result, a lack of profitability. In fact, the airline industry since inception has a cumulative net loss. That’s right, they haven’t made a dime.

So, you would think that if there were things you could control as the CEO of a major airline, you would. I am referring to fuel costs. You can hedge fuel costs. You can lock in prices for certain amounts of fuel, deliverable by a certain date in the future. In the world we live in today, you would think the major airlines would have hedged much of their future fuel needs, especially when these companies are losing money hand over fist and United and US Air are in Chapter 11.

Amazingly, American Airlines has hedged only 15% of its fuel costs for the first quarter of 2005. With oil futures hitting a record $57 per barrel this week, that could be disasterous for the company’s bottom line. To make matters worse, hedging beyond March was recently characterized as “minimal” by American’s CEO. He added that total fuel expense for 2005 could hit $5 billion in 2005, if prices remain high. American is only expected to have $19 billion in revenue this year, so 26% of that is paying for gasoline.

If oil keeps rising, it’s hard to see how this industry can avoid having more well-known carriers headed back to bankruptcy court.

Full Disclosure: I am short American Airlines (AMR) stock and own Delta (DAL) puts.

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