American is taking fuel prices for what they are, but Southwest is trying to be ‘right’ Less than two weeks after American Airlines patted itself on the back about how shareholders would benefit from its decision to stop hedging against the risk that fuel prices might rise, the air carrier lowered its margin outlook because—you guessed it—fuel prices spiked up. Should investors feel they’re being duped by management’s claim that hedging is a bad idea, since they are now at the mercy of fuel price increases? The stockAAL, -0.06% slumped 3.9% in afternoon trade Monday, compared with a 0.3% decline in the S&P 500. The answer is “no”. Analyst Rorrie Mars at Atlantic Equities in London told MarketWatch that the company is just trying to play it straight. Rather than try to beat the market, like some other airlines, American has decided that it has to accept the bad when costs rise, if it wants to reap the benefits when costs fall. Maybe investors should be more worried about Southwest Airlines’ LUV, -0.14% attempt to be “right” about fuel prices. On Jan. 27, American Airlines said based on its forecast of 2015 fuel prices, it expected to save $5 billion in fuel expenses from a year ago. Chief Executive William Douglas Parker said in a conference call with analysts that it didn’t make sense to hedge, not just because the potential large costs--large drops in fuel prices seen in 2014 are “really costly to companies that have locked in prices” -- but because he believed that seat prices are more tied to demand than fuel costs. So what happens when fuel costs rise and demand falls? Investors punish the stock. Continuous jet fuel futures prices have spiked up 14% since Jan. 27, after plunging 38% during the second half of last year. And American said on Monday that traffic dropped to 16.8 billion revenue passenger miles in January, down 2.9% from a year ago, and down 7.2% from December. So less than two weeks since it said it expected first-quarter fuel costs per gallon of $1.71 to $1.76 and a pretax margin between 13% to 15%, it changed its estimates to $1.81 to $1.86 and 12% to 14%, respectively. “It’s just them saying what the market is. They aren’t predicting what fuel prices are going to be,” Atlantic Equities’ Mars said. The company declined to comment about its stock price. But that can’t necessarily be said about Southwest Airlines. Before the market opened on Jan. 22, the company said after locking in a per-share first-quarter loss of 10 cents on their fuel hedges, they have “unhedged” in 2015 because of their view that fuel prices were headed south. Chief Executive Gary Kelly said in a conference call that, “fortunately our folks were right and managed that, I think, very, very well.” What do they think now after a 14% spike up in prices in nine sessions? Southwest’s January traffic report out Monday had no mention of fuel prices, and the company wasn’t immediately available for comment. And while traffic rose 8.6% from a year earlier, it fell 13% from a month ago. Meanwhile, the stock was down 2.5% on Monday, but was still up 2.9% since Jan. 21. Tomi Kilgore