U.S. airlines adjust to high fuel costs

By Paritosh Bansal

WASHINGTON (Reuters) - Discount carrier Southwest Airlines (LUV.N: Quote, Profile, Research, Stock Buzz) has put life vests under seats so that it can fly over water and make routes such as Houston to cities in Florida shorter, burning less fuel.

AMR Corp's (AMR.N: Quote, Profile, Research, Stock Buzz) American Airlines, the world's largest carrier, and low-cost carrier JetBlue Airways Corp. (JBLU.O: Quote, Profile, Research, Stock Buzz) are making their aircraft lighter.

U.S. airlines are getting more innovative as they sweat over ways to reduce costs amid high oil prices. Many see jet fuel conservation as a necessity, while price hedging has become part of the standard operations manual, top airline executives said at the Reuters Aerospace and Defense Summit in Washington, D.C. this week.

"When you have got an item that you have no control over, it is pretty tough to build a business plan if you can't build a model that has it within a certain range," Southwest Chief Financial Officer Laura Wright said.

Fuel competes with labor as an airline's largest cost, and volatility in prices over the past two years has wreaked havoc on the industry.

U.S. crude oil CLc1 was last down 9 cents at $62.10 a barrel on Thursday in New York, having eased from an all-time peak of $78.40 in July.

A $21 change in the average price per barrel of oil amounts to a $1.5 billion year-over-year difference in the fuel bill of American Airlines, said Thomas Horton, the airline's chief financial officer.

If fuel prices rise again, airlines fear the recovery they have enjoyed over the last year would be nipped in the bud.

As a result, many carriers see fuel hedging as an insurance policy they must take out to survive.

"We're buying in order to reduce volatility and make that more predictable," Alaska Air Group (ALK.N: Quote, Profile, Research, Stock Buzz) Chief Executive William Ayer said.

Alaska Air, parent of Alaska Airlines, tries to have at least 50 percent of its fuel requirements hedged 12 months out, Ayer said.

Southwest attempts to have about 85 percent of its requirements for the year hedged.

"It's our bias to try to be more hedged, rather than less," Wright said. "Unfortunately, we cannot put hedges on in the future at the prices we were able to in the past because the forward curve is up there."

JetBlue is even toying with the idea of getting its own oil storage facility so that it can buy fuel and store it when the price is right.

"We are actually looking at ways of maybe even getting some decommissioned or older tankers," Chief Executive David Neeleman said. "We can just fill that thing up and drain it out."  Continued...