United Continental Holdings and Delta Air Lines have reduced fuel hedging as oil plunged close to a six-year low.
After losing hundreds of millions of dollars on hedges, two of the world’s biggest airlines are betting that oil prices won’t rally any time soon.
United Continental Holdings and Delta Air Lines have reduced fuel hedging as oil plunged close to a six-year low. They’ve become more like American Airlines Group, the biggest global carrier, which closed its last hedging position in 2014.
“There is a growing realization that American’s approach was the smarter one,” said Bob Mann, president of airline consultant R.W. Mann & Co. “These programs have not met expectations, costs are very high and the results have underperformed.”
Getting it wrong has been costly. Hedging losses over the past three quarters totaled $1.95 billion for Delta, the world’s third-largest airline; $650 million for United, the second largest; and $326 million for Southwest Airlines, the fourth-biggest U.S. airline, according to data compiled by Bloomberg. The companies locked in fuel prices before the price of crude collapsed over the past 17 months.
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Losses were calculated by totaling the settled hedging results for each quarter as provided on company releases and conference calls. The hedging figures were confirmed by spokesmen at all three airlines. The airlines, all U.S.-based, are ranked by their passenger traffic.
Delta said last month that it hedged 5 percent of its fuel for next year, down from 20 to 25 percent announced in May and 30 to 40 percent announced last year for 2015.
United is 17 percent hedged for next year, Gerald Laderman, acting chief financial officer, said last month on an earnings call. In October 2014, the company said it was 35 percent hedged for the following 12 months.
While hedging can protect against price surges, airlines pay for the benefit. Alaska Air Group, for instance, paid an average $3 a barrel for call options that gave it the right to buy oil for delivery in the first quarter at $76, the company has said.
“You look at how much our competitors have lost this year on that so-called safe insurance policy,” Scott Kirby, American’s president, said in July on the company’s second-quarter earnings call. “There is no free lunch. You can’t go off and protect against the downside and pretend it doesn’t cost you a lot of money.”
WTI, the U.S. benchmark, has dropped as low as $38.24 a barrel this year from $107.26 in June 2014 amid a supply glut that the International Energy Agency estimates will persist until at least mid-2016.
Aviation fuel is down 44 percent in the past year to about $1.40 a gallon in New York, according to data compiled by Bloomberg.
West Texas Intermediate crude oil has fallen 42 percent over the period to about $43 a barrel on the New York Mercantile Exchange.
With fuel accounting for as much as 30 percent of their costs, airlines operate sophisticated oil forecasting models, said George Ferguson, senior aerospace and airline analyst at Bloomberg Intelligence.
“The bigger picture is they feel oil is going to be lower for longer,” Ferguson said.
Southwest has taken a different course. It’s increased its hedging again after cutting it earlier in the year. The carrier raised coverage to 35 percent for next year, up from 10 percent announced in February. That amount was down from 40 percent covered last year.
“We view our hedging program as catastrophic insurance,” said Chris Mainz, a Southwest spokesman. “We will continue to actively manage our hedging position to protect from the impact of rising fuel costs.”