Biggest U.S. Airlines Miss Cheapest Jet Fuel Prices in 12 Years

Jet Fuel: To Hedge or Not to Hedge?
  • Delta has been ‘burned’ before by fuel hedging, CEO says
  • American has no plans to return to hedging at current time

The biggest U.S. airlines missed their chance to lock in the cheapest energy costs in more than 12 years after jet fuel surged as much as 80 percent since January.

The fuel on the U.S. Gulf Coast was trading at $1.37 a gallon Friday, up from less than 80 cents on January 20, the lowest intraday level since November 2003. The gain came as oil prices rebounded about 77 percent over the same period.

Major jet fuel consumers -- including Delta Air Lines Inc. and United Continental Holdings Inc. -- didn’t lock in prices at those January lows after the airline industry lost billions on hedging as crude plunged to about $26 a barrel earlier this year from more than $100 in 2014. The carriers also were discouraged by the rising cost of the hedges themselves.

“To the extent that they lost money when oil prices fell, they could have made up some of those losses on the way up,” Bob Mann, president of airline consultant R.W. Mann & Co., said in a phone interview. Had airlines hedged fuel they “would have had exceptional gains on that portfolio,” he said.

American Airlines Group Inc., Delta, United and Southwest Airlines Co. all reported record adjusted profits in 2015 and paid a combined $12 billion less for fuel -- which historically accounted for about one-third of industry operating costs. Employee compensation has topped fuel as the biggest expense for carriers. The airlines said they would have made even more without the bad hedging bets.

Delta Hedges

Delta, which closed its hedge book in January after losing $4 billion in the past eight years trying to guard against a surge in fuel prices, got “burned” trying to protect against price spikes, Edward Bastian, the airline’s chief executive officer, said in a Bloomberg TV interview May 2. The company wouldn’t return to hedging even if oil fell below $30 a barrel again, he said.

“There is too much volatility,” Bastian said. “If we were to get back into the market, we wouldn’t get back until we saw a point where there was some longer-term stability to know what to expect.”

Delta didn’t immediately respond this week to a phone request for additional comment.

United’s Positions

United, which is 12 percent hedged for the final nine months of 2016, hasn’t added hedging positions since July, Gerald Laderman, acting chief financial officer, said in an April conference call. The carrier no longer sees it as a way to manage “near-term volatility,” Vice Chairman James Compton said on the call.

United lost $138 million from fuel hedges in the first quarter, down from $161 million a year earlier, according to its first-quarter financial statement. Megan McCarthy, United’s spokeswoman, didn’t return an e-mail seeking comment.

American’s Chief Financial Officer Derek Kerr said in April that the airline made “no change” it its strategy of shunning fuel hedging. American Airlines has “nothing new to add,” Josh Freed, a company spokesman, said by phone June 9.

Southwest reduced by half the percent of fuel hedged for the second half of this year to between 30 and 35 percent, Tammy Romo, chief financial officer, said in January. The airline recorded fuel hedge losses of $275 million in the first quarter, up from $47 million a year earlier, according to financial statements.

Volatility Insurance

“We view our hedging program as insurance against the volatile nature of fuel prices, which make up about a third of our cost structure,” Southwest spokesman Chris Mainz said in an e-mail on June 9. “We don’t try to call or beat the market.”

Companies paid different prices for fuel in the first quarter, based on the extent to which they were still partially hedged. American paid $1.21 a gallon and Southwest $1.78, according to company statements. In the second quarter, United forecast it will pay $1.35 to $1.40 a gallon and Delta said $1.48 to $1.53.

U.S. airlines have less incentive to hedge today in part because they are flying newer and more fuel-efficient aircraft and because the cost of protection against price surges has increased amid a more volatile market, said Samuel Engel, vice president for ICF International, who leads the company’s aviation practice.

“Hedging, insurance contracts, got very, very, expensive, prohibitively expensive,” he said. “If you thought you could predict the oil market, you wouldn’t need to run an airline.”

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