Mark Tatge and Phyllis Berman pose the question, "Will Katrina Ground Airlines for Good?" in last week's article in Forbes. They argue that Delta is likely to be hit twice--by rising fuel costs and by its dependence on traffic in the affected areas. They judge Northwest to be near the brink, too. The second paragraph below tells us almost everything we need to know about the industry:
Now, the situation is at a breaking point. Not just for Delta, but for the entire industry. Katrina should reduce total refining output by 43 million barrels over the next two months, according to Lehman Brothers. That translates to about a 10% to 15% reduction in the supply of jet fuel. Oil prices, despite falling back slightly in the past day, are expected to stay above $70 per barrel until at least the end of the year.
Both Delta and Northwest have no hedges against exposure to rising fuel prices. AMR's American Airlines and Continental Airlines, although in better financial shape, have no hedges in place either. The only airline with significant hedging is Southwest Airlines, which holds hedges for 65% of its 2006 fuel needs--most of it at $32 per barrel, according to Lehman Brothers.
Checking the stock ticker, Southwest has a market capitalization of $10.9 billion. American is at $2 billion, and the total of Continental, Delta, Northwest, and United is no more than $1.5 billion. Given the thrust of the article, these relative magnitudes should come as little surprise.