Burn the "speculators"! Why are airlines sounding the alarm against one of their favorite activities?

AuthorMangu-Ward, Katherine
PositionRant

IT WILL NOT escape the notice of astute readers that heavier-than-air flight requires a fair amount of consumable energy. Fuel is a big chunk of most airlines' operating budgets. So you can't help being a tad suspicious when normally hypercompetitive airline companies suddenly join hands, form a ring around their customers, and beseech us to urge our representatives in Congress to Stop Oil Speculation Now!

"Twenty years ago," says a letter signed by dozens of airline executives and blasted into thousands of frequent flyer inboxes," 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts."

Just who are these greedy paper pushers who are "hurting our families" by callously driving up oil prices and trading a barrel "20-plus times before it is delivered and used"? Well, for starters, the airlines themselves.

The letter came to me from Southwest, whose stunning success has been a staple feature story on newspaper business pages in recent years. Even as other airlines reported a collective $6 billion loss in the second quarter of 2008, Southwest floated above the fray with its 69th consecutive profitable quarter.

Southwest credits its profitability to savvy hedging against rising fuel prices. When a company hedges, it locks in a price for oil at a fixed date in the future by signing a contract today promising to buy the oil at that price no matter what happens to the market tomorrow. If prices go up, Southwest gets to buy at below-market rates. If prices go down, the airline has to pay more than its competitors for the same oil. Since 1998 the company has saved about $3.5 billion this way, a figure equal to 83 percent of its profits during that period.

"When oil got to $40 a barrel, we thought, 'Oh, wow! It's too late,'" Southwest Treasurer Scott Topping told USA Today in July. "Then it went to $60, and to $80, and then to where we are now. At each step along the way, the question 'Is this something we should continue to do?' became more and more difficult to answer. But our overall philosophy led us to keep buying hedges. It's a matter of discipline."

Southwest isn't the only airline to...

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