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Oil's Dropped, but Price Contracts Haven't
Gary Kelly is chief of Southwest Airlines, which made bad oil bets.
(By David Zalubowski -- Associated Press)
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Whether that will look smart next year depends on how low oil prices go. Royal Caribbean has already locked in prices for 39 percent of the fuel it expects to need in 2009.
Many companies still prefer to pass on energy costs to customers. FedEx, for example, has a fuel surcharge it adjusts every month.
Procter & Gamble also tries to factor energy costs into its business, though the company cautions that lower oil prices don't immediately translate into lower prices.
"We have commodity costs that should be headed down, not in the October to December quarter because we're still paying today for $120 to $140 [a barrel] oil today in our costs, but we should see costs moving down in the first half of calendar 2009," Clayton C. Daley Jr., chief financial officer of Procter & Gamble, said on CNBC yesterday.
"The time it takes for feedstocks to show up in our costs is three to six months later, and then, of course, they have to pass through our inventories and our accounting systems as well," he added.
Airlines have been big losers as declining oil prices have made their oil gambles look bad.
In addition to Southwest, United Airlines' parent company, UAL, booked a $519 million loss on fuel-hedging contracts in the third quarter. The values of the contracts have fallen sharply along with the price of oil.
There were good reasons for airlines' efforts to move aggressively to reduce fuel costs. Fuel expenses supplanted labor as the top cost at airlines in 2006. From that point on, the fate of airline stocks has depended largely on the direction of oil prices, with shares deteriorating badly as oil prices ran up earlier this year.
Oil prices peaked at $147 in July. At the time, Wall Street analysts were predicting even higher prices. A Goldman Sachs analyst predicted in June that oil would hit $200 a barrel by the end of the year.
Believing the forecasts, airlines made hedging bets that oil was going to go higher, aviation consultant Julius Maldutis said. But they were wrong. "All the specialists who predicted oil would go above $147 should really be embarrassed at this point," Maldutis said.
Staff writer Sholnn Freeman contributed to this report.
