Delta, Continental Make Different Bets On Oil Prices Wednesday August 11, 5:20 PM EDT NEW YORK (Dow Jones)--As oil prices continue to reach new highs almost daily, Delta Air Line Inc.'s (DAL) decision to sell its fuel hedges in February is looking more and more costly. And Continental Airline Inc.'s (CAL) decision to buy hedges at the highest prices the airline has ever paid is looking more and more like a good deal. The airlines took different bets on the direction of oil prices, and both decisions show the quandary airline executives face as oil prices continue to rise. On the one hand, major airlines face all kinds of problems these days, and a few, like Delta, simply cannot afford to have much-needed cash tied up in fuel hedges. On the other hand, airline executives with a bit more cash must decide whether it makes much sense to buy hedges at all now, with prices so high. "It doesn't take a heck of a lot (of cash to buy hedges), but Delta needs every penny," said Standard & Poor's analyst Jim Corridore, adding that Delta had no choice but to sell the hedges. At the same time, "there are no risk-free hedges," he said, and Continental's bet on $40 hedges looked pretty risky when the airline first made it. Corridore doesn't own airline shares. Continental Chief Executive Gordon Bethune said in a conference call last month that hedges are short-term insurance, and not always very reliable. "It's kind of like putting $200 million down in Vegas and betting red or black," Bethune said. Hedging fuel prices involves buying futures contracts or other instruments to offset a possible rise in oil prices. Extensive hedging programs keep airlines' fuel costs stable and predictable, while small hedging programs at least ensure that fuel prices won't cause an airline to go under. The idea isn't to turn a profit on hedges, but to buy hedges as insurance. Earlier this week, oil prices reached a fresh high, with September futures reaching more than $45 a barrel. Oil experts say prices are likely on their way to $50 - completely uncharted territory - as growth in global demand outstrips relatively steady supply. But back at the beginning of the year, oil prices were hovering above $30 a barrel. $650 Million Jump In Delta's Fuel Costs Those price swings are the main reason Delta Air Lines' fuel costs will rise by around $650 million this year compared with last, the airline said in a filing with the Securities and Exchange Commission this week. At the beginning of the year, Delta, Atlanta, owned hedges covering 32% of the airline's fuel needs at prices that corresponded to 76.5 cents for a gallon of jet fuel. Delta freed up much-needed cash by selling the hedges for $83 million. But if the airline had kept the hedges, it would have saved around $150 million this year, based on calculations by Dow Jones. Delta officials declined to comment on the calculations, but the airline has said it will use 2.5 billion gallons of fuel this year, and will likely pay around $2.588 billion, including the gain on selling the hedges. And Delta said in a filing if oil prices rise by 10% to $50 a barrel, that adds $260 million to the bill. Those are costs Delta can ill afford, as the airline struggles to cut costs to remain solvent. Experts say Delta's survival depends on getting a new, cheaper contract with pilots. But even that may not stave off bankruptcy if other costs keep rising. As of the end of the second quarter, Delta had no fuel hedges in place. Meanwhile, in Houston, Continental faced a different question earlier this year. The airline didn't buy any hedges in 2003 because it was facing its own liquidity problems. Then, oil prices rose, and executives bet they would drop. They didn't. So, Continental bought hedges to cover 25% of its fuel needs at $40 a barrel, and 20% of its needs at $32 a barrel. Continental's chief operating officer, Larry Kellner, said on a conference call in July that he assesses the airline's hedging program by comparing it with other airlines. "We are in a decent fuel hedge position," Kellner said. Hardly any U.S. airlines have hedged the majority of their fuel. The best-hedged airline in the industry is Southwest Airline Co. (LUV), which had hedged 80% of its fuel needs at prices below $30 a barrel. Continental's Kellner said during the conference call that his long-term response to fuel costs is to fly fuel-efficient airplanes. By adding winglets, which look like fins, to the end of airplane wings, the airline can cut its unit fuel burn by 25% compared with 1998, when Continental started culling older airplanes out of its fleet, he said. "That's an exacting 25% permanent fuel hedge," Kellner said. He later added: " Ultimately, you are going to have to live with whatever the current fuel cost is a year, year-and-a-half out. And it's important to stay in sync with the industry and make sure you've got a business plan that works with whatever the current fuel price is." - By Elizabeth Souder, Dow Jones Newswires; 201-938-4148; elizabeth.souder@ dowjones.com Roger EWROPS