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Rising cost of crude oil stirs concern at Northwest
The pilots union says it wants the airline to take a longer-term approach to controlling fuel prices - the carrier's biggest cost.
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With oil spiking above $92 a barrel Friday, the head of the Northwest Airlines pilots union said he is growing increasingly worried that management didn't try to hedge a substantial portion of its fuel supply against price run-ups over the long term.
"My concern is that the executives responsible for fuel-price management didn't take the opportunity earlier this year -- when oil was in the mid-$50 range -- to manage their risk in 2008," pilot leader Dave Stevens said in an interview.
Ben Hirst, senior vice president of corporate affairs and administration, said the airline has reduced its exposure to high fuel prices for the last quarter of this year, hedging half of its fuel supply for that period.
In a September statement, Northwest indicated that about 50 percent of its fuel supply was hedged from September through December.
"Forty percent of the exposure is hedged using collars with a floor of approximately $56 per barrel and a ceiling of approximately $75 per barrel," the airline said.
"The remaining 10 percent is hedged using swaps priced at $62 to $65 per barrel."
But Northwest executives have not made public statements about whether they have taken steps to guard against high oil prices in 2008.
The carrier's fuel bill was $849 million for the second quarter.
"We are evaluating hedging opportunities with respect to 2008 on a daily basis," Hirst said in an interview.
CEO Doug Steenland and other Northwest executives are expected to face questions concerning the subject from analysts and reporters Monday, when the carrier reports its financial results for the third quarter.
"I've expressed in almost every meeting with senior management my concern of inadequate fuel hedging," said Stevens, chairman of the Northwest branch of the Air Line Pilots Association (ALPA). "We are asking them to manage risk."
Fuel is Northwest's top expense. The price of crude has risen steadily this year, from the $50 range in January to $90 and more per barrel this week.
Stevens said the pilots have continually told executives that the airline needs to take a longer-term approach to fuel hedging, despite the costs that that approach entails.
In an interview last week, Steenland said the experts that Northwest has consulted expect the price of oil to fall. He said Oct. 17 that the consensus is that "oil is not going to stay at $87 a barrel, it should come down."
Oil prices reached a new record Friday, after the U.S. government said Iran's military had supported terrorism.
Oil isn't simply a supply issue, Stevens said. "This is a political issue. They have to manage for these spikes."
He suggested that it would be "reasonable" to hedge 50 percent of the airline's fuel supply on a longer-term basis.
"Today it is $92. In all likelihood, as this escalates, we may see a spike over $100," Stevens said. "What fuel management program is in place to even out those spikes?"
Hirst said that Northwest executives continually look at hedging opportunities "and make the best judgments we can about what is in the best interest of the airline."
In a meeting this month with board Chairman Roy Bostock, Stevens said that he emphasized the need to manage the company's fuel-price risk.
The pilots previously agreed to concessions that are saving the airline more than $600 million a year. Those savings include a pay cut of 15 percent ratified in late 2004 and a 23.9 percent cut approved in 2006.
"They shouldn't think that they are going to come back to the pilots again if they mismanage the corporation," Stevens said.
Liz Fedor • 612-673-7709
Liz Fedor • lfedor@startribune.com
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