July 21, 2010 / 11:55 PM / 9 years ago

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

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