Word: fuel
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...create a dilemma for Jean-Claude Trichet, president of the European central bank, the body that sets monetary policy for the entire euro zone. Economists say the bank's 2% benchmark interest rate is far too low for the strongest economies, providing them with plentiful cheap money and helping fuel both a credit boom and, especially in Spain, a potential housing bubble...
...years ago, before the Iraq war, even before 9/11, Southwest's analysts looked at fuel prices and saw all arrows pointing north. Guided by then chief financial officer Gary Kelly, the airline assembled a strategy to gird against potentially calamitous surges in oil prices. Two full-time oil specialists at Southwest's Dallas headquarters spent most of their time just watching oil markets and crunching numbers. By the time financial disaster struck the industry, Southwest had signed contracts guaranteeing the airline a certain price for fuel in the future, no matter how high the market climbs...
...soaring oil prices, hedging has become a crucial part of business for the most successful airlines--the smaller, upstart carriers that aren't burdened by the legacy costs of the old majors. Since energy is usually an airline's second highest cost (after labor), any tweaks in fuel costs or use can turn into big savings. All the major airlines have hedged fuel prices since the 1980s, but as the major carriers have run into financial difficulties in recent years, they have no longer had the cash--or the creditworthiness--to play the oil-futures market. Last year Delta held...
...major airlines aren't commenting on why they don't have more aggressive hedging positions--or any positions at all in some cases. But there is no question that higher energy prices are crippling the industry, which will spend $6.8 billion more on jet fuel this year than last year's $21.4 billion. Since 2001, prices have increased 91%. "Without the doubling of oil prices over the last three years, the industry would not be in the economic crisis we find ourselves," Air Transport Association president James May told Congress last month. "And the future doesn't look any brighter...
...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...