Crisis Report - 17-Oct-08

The good news: Oil below USD70 per barrel. Oil prices have fallen below USD70 per barrel for the first time in 15 months, sending US airline shares sharply higher, despite the first quarterly loss in 17 years for Southwest Airlines. As the oil price has crashed, Southwest has taken a huge hit on the relative value of its hedge contracts, until recently the envy of the rest of the airline industry. With falling load factors and rising non-fuel costs (+1.8% in 2Q08), Southwest’s market darling status could quickly evaporate. Still, the stock soared 8% overnight as the broader US market rose 4%. United Airlines surged 21%, while Continental, Delta and American jumped about 15%. There is an expectation falling oil prices will offset any slowdown in passenger demand. This is probably illusory.

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