U.S. Airlines Go After Oil Speculators – Finally, Someone Has

Tuesday, June 17, 2008
Airlines to call for U.S. curb on oil speculators
By John Crawley

WASHINGTON – U.S. airlines, battered by skyrocketing fuel prices, will on Tuesday call for urgent congressional action to stem what they believe is excessive speculative trading in oil markets. The focus on commodities trading is the industry’s strongest appeal to the government to address global prices, which have nearly doubled this year and have decimated industry balance sheets. Carriers are burning through cash reserves to stay aloft. James May, president and CEO of the leading trade group for commercial airlines, the Air Transport Association, will tell Senate lawmakers at a hearing called to investigate complaints about speculators that 2008 could be the worst year ever financially for airlines.

“If Congress does not act soon, this country will not have a viable airline industry,” May said in a statement provided to Reuters ahead of the hearing.

May plans to outline what his group calls the importance for “urgent, critical government oversight” of commodities futures trading.

Airlines and other industries want Congress to change rules regulating energy commodity futures markets to make trading “fairer and more transparent,” May’s group said.

Analysts expect heavy airline losses for the current quarter and full year on jet fuel prices that have gone from $90 a barrel at the end of 2007 to $163 – including refining costs – on June 13. Merrill Lynch estimates the eight biggest domestic carriers alone will lose $5.3 billion this year.

These include American Airlines, a unit of AMR, Delta Air Lines, UAL’s United Airlines, US Airways, Northwest Airlines and other carriers.

Most carriers are churning through cash reserves to help pay for fuel, which is their highest expense, and some experts predict possible bankruptcies next year involving the biggest airlines if prices do not retreat.

Airline shares rose on Tuesday, with crude prices easing off Friday’s close.

The top U.S. oil market regulator and officials from leading futures exchanges will also testify at Tuesday’s joint Senate hearing.

Many U.S. lawmakers – mostly in the Democratic majority – see excessive speculation as the main culprit for increased prices. The Bush administration is looking into speculation, but believes oil price spikes are being driven by the fundamentals of world supply and demand.

Even if speculation accounts for a fraction of price increases, airlines would welcome any government relief.

Every $1 increase in the price of a barrel of oil adds $465 million in fuel expenses, industry figures show. U.S. airlines are on track to pay more than $61 billion for fuel this year, about $20 billion more than last year.

“How much fluff is in the market because of speculation is anyone’s guess,” said Robert Mann, an airline industry consultant who believes airlines are in a fix partly of their own making.

He notes that airlines, in most cases, failed to adequately hedge their long-term fuel purchases and have not invested nearly enough in more-efficient aircraft.

“At the end of the day they’d be talking about paying spot prices on less than half their consumption instead of, in some cases, all of it,” Mann said.

Mann also said a reliance on smaller planes in recent years at major airports and over-scheduling have generated less revenue and worsened congestion and delays, which wastes enormous amounts of fuel.

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