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.
It increasingly looks like the debt levels of the airlines relative to their cash flows are a binding constraint on their hedging.