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Even the most successful airlines are likely to run into difficulties on the hedging front soon. With oil prices so high for so long, no investment bank is willing to cover $26 barrels of oil for anyone, no matter how much cash the airlines can put up front. That's why Southwest's fuel savings will decrease with time. In 2009, for example, the airline will be able to buy just a quarter of its fuel at $35 per bbl. No partner is willing to cover hedges that low now that oil has passed $50 per bbl. "We're willing to write hedges," says John Kilduff, an energy analyst with brokerage firm Fimat. "The question is, Does it make sense to be locking in crude oil when prices are this high? It's hard to imagine it is the right time."
Alaska Airlines, with $800 million in cash, is second to Southwest in benefiting from hedging, according to industry analyst Cordle. The low-cost carrier, which largely serves the West Coast, has netted more than $100 million in savings from its smart hedging positions since 2002. This year the airline will buy half its fuel at $30 per bbl. But like Southwest's, that spread will diminish by the end of the decade. By then, all airlines will have to face the reality that their core business--not their fancy financial instruments--can be the only guarantor of success. JetBlue, the profitable low-cost carrier, is less hedged than Southwest and Alaska, largely because the company is only five years old and fuel strategies evolve over time. Still, JetBlue's profits are proof that offering a service to which customers return is the best strategy. In the long run, says Steve Rock, manager of fuel hedging and finance for Alaska Airlines, "hedging is not going to be the savior of the airline industry." Meanwhile, however, it's buying some valuable time. --With reporting by Sally B. Donnelly/Washington