US airlines see benefit from financial reform law

* New law limits speculative commodities trading

* Airlines expect more predictable fuel prices over time

* Economists split on whether speculators drove prices up

By John Crawley

WASHINGTON, July 21 (BestGrowthStock) – U.S. airlines see a
multi-billion-dollar benefit from the financial reform
legislation signed into law on Wednesday, predicting it will
cut their fuel costs as it curbs speculative commodities
trading.

Every $1 increase in the price of a barrel of oil costs
airlines $465 million per year in additional expenses,
according to industry figures.

“The legislation has the potential to be a
multi-billion-dollar benefit to this industry,” James May,
chief executive of the Air Transport Association, told
Reuters.

A provision in the measure signed by President Barack Obama
limits the size of trades, or futures contracts, for anyone not
hedging with the intent of taking delivery of fuel.

Fuel consumers have argued that speculation in recent years
caused volatile oil price swings and higher costs that drove
some carriers under and severely tested the financial stability
of others.

Crude prices are higher compared to last year but about
half their record high of $147 per barrel in mid-2008. Oil
ended New York trading below $77 per barrel on Wednesday.

But some economists believe speculation was not a factor in
that run-up and an ensuing drop, casting some doubt on whether
airlines will see the benefits they expect.

Nevertheless, the issue was the top legislative priority of
the industry even as oil market volatility has moderated this
year.

Fuel is the highest airline cost, accounting for about a
quarter of expenses. That is down from a high of 35 percent
during the oil price run-up two years ago.

May and other industry officials are optimistic that new
speculation limits would help foster price predictability over
time, and create even less reason for carriers to take on
significant risk by trying to stabilize their own costs through
expensive commodities hedging.

“The airlines can manage higher jet fuel costs. It’s the
volatility that’s a problem,” said Helane Becker, an airline
analyst with Dahlman Rose & Co.

Carriers “have a better shot at sustained profitability” if
they can better plan their fuel pricing, Becker said.

HEDGING HEADACHES

Most airlines, including American Airlines (AMR.N: ), United
(UAUA.O: ) and Delta (DAL.N: ), hedge a portion of fuel expenses
but the volume and price differ. Contracts, which lock in
prices, are a bet on commodity markets that crude or jet fuel
prices will go up or a strategy for ensuring stable costs, even
at a higher level.

Southwest Airlines (LUV.N: ) has been an aggressive hedger,
saving billions over the years. Market volatility, however, in
2008 caused Southwest and rivals to take huge charges against
earnings as the value of their portfolios plummeted when prices
fell from $147 to $40 in six months.

Most big carriers are significantly reducing their hedge
positions for 2011.

The U.S. Commodity Futures Trading Commission proposed in
January new curbs on speculation in energy futures markets,
responding to users’ complaints.

But the CFTC has said it will need to rework its proposal
to take into account the new law requiring speculative position
limits on commodities across both futures and over-the-counter
derivatives markets.

Details on how it will change its plan are not yet
available. [ID:nN16103342]

Stock Market Basics

(Reporting by John Crawley with additional reporting by Karen
Jacobs and Roberta Rampton; Editing by Tim Dobbyn)

US airlines see benefit from financial reform law