Fuel hedges start to bite

Implications: As fuel prices fall, what happens with all those pricey hedges at well over $100/barrel? Can this industry get anything right?  Maybe circumstances are beyond any human comprehension.

Analysis: Not  so long ago, any airline without a fuel hedge was regarded as essentially retarded. Well how things changed - and so quickly too. Rynair's CEO was adamant fuel was over priced but even he caved and bought hedges. "While the recent fall in oil prices is welcome, it won't have much impact on our full-year results because we have already hedged at $124 per barrel and any fuel savings may be absorbed by lower fares and yields as we stimulate growth in a recession this winter," he said at the annual meeting in Dublin.

Well the other shoe has dropped and now many hedges that looked great are perhaps not so great. On Wednesday, United Airlines reported that it would lose $544m this quarter due to fuel hedges, including $72m in realized and $472m in unrealized losses. The hedge positions required United to put $400m aside as restricted cash for those on the other side of the transactions. This is tough for United.

In July, Northwest Airlines said that it hedges required payment if crude oil fell below $108. For 2009, its hedging against 10% of its fuel requires payment if crude drops below $112.

JPMorgan analyst Jamie Baker notes that recent reduction in the price of oil over one week meant a savings of $3bn for the airlines. 

American Airlines predicted Thursday that it will spend about $200m less for fuel in the third quarter than it estimated two months ago. For the full year it projects to spend $9.46bn on fuel compared with a July estimate of about $10.2bn – a reduction of about $750m.