It's a sign of the times when commodities hedging can mean the difference between survival and disaster. Last week, I highlighted Briggs & Stratton's (NYSE:BGG) successful hedge on aluminum, which helped it lock in lower-priced raw materials for this year's production costs. Similarly, Alaska Air (NYSE:ALK) was able to narrow its fourth-quarter loss thanks partly to a successful hedge on fuel.
A contract locking in today's commodities price for tomorrow's production can work for you or against you, depending on which way the prices go. This year, fuel hedging worked in Alaska Air's favor; it was one of only a few major airlines to post an adjusted profit for fiscal 2005, according to a statement from CEO Bill Ayer.
A glance through its recently released fourth-quarter results underlines this success. In the line that reads "Fuel Hedging Gains (Losses)," we see that Alaska Air lost $24.7 million in the most recent period, versus a loss of $7.8 million in the year-ago period. For the full year of 2005, however, the company posted a substantial gain of $173.9 million, compared to $85.5 million in 2004.
Fuel costs are a critical part of an airline's business, and hedging is one way to deal with these escalating prices. Another is to upgrade your fleet with lighter and more fuel-efficient aircraft. Boeing's (NYSE:BA) business has been booming with its introduction of the 787 Dreamliner, which is expected to cut fuel consumption by 20%. Management from Alaska Air suggested that its 26 MD-80s, which are older and less efficient, are under consideration for replacement.
While I digest this -- a business that is dependent on a successful hedge on something as unpredictable as commodity prices, and an industry that must spend millions of dollars on new aircraft to save millions of dollars in fuel and maintenance costs -- I am left wondering why I would consider an investment in this segment of the market. Given this challenging environment, I'm not willing to put my own money into Alaska Air, and I can't recommend that others do likewise.
More mile-high Foolishness:
- Continental Airlines (NYSE:CAL) has been singing the blues.
- But Southwest Airlines (NYSE:LUV) continues to soar.
- And JetBlue (NASDAQ:JBLUE) is flying under the radar.
Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
