United Airlines faces losses on Jet fuel futures contracts
18 Sep 2008
United Airlines has said that it is on course to losing $544 million on futures contracts that it had used to hedge against rising fuel prices this quarter.
UA said that it had recorded $72 million in actual losses, and $472 million more in unrealized losses, which have forced the airline to mark $400 million as restricted cash for parties on the other side of its oil price bets.
However UAL Corporation's operating unit, United Airlines will actually save money on fuel purchases since oil prices are now lower than the time when United had bought the futures contracts. If oil prices were to rise, UAL's losses on futures contracts will decline.
Oil was trading at around $94 per barrel on Wednesday, way below its July peak of $147. It closed the day on Wednesday above $97 per barrel.
Industry observers say this is how it should work in the first place, with, hedgers being below their hedges, and witnessing savings on the cash market side.
Even though the price of oil has fallen, jet fuel prices have not come down as much on account of refining capacity being fully utilized, and hurricane Ike shutting down refineries on the eastern seaboard because of power outages. The 14 refineries Ike shut down produce 19 per cent of jet fuel consumed in the US.
United Airlines also said that it is reducing overall capacity by around 3.6 per cent, and anticipates its third-quarter passenger revenue to go up by 4.5 percent to 5.5 percent for each mile.
Industry observers point out that other airlines would be facing similar scenarios, though they are yet to reveal their hedging losses or gains for the third quarter. Northwest Airlines had said in July that its hedges require it to pay if crude oil falls below $108, and its hedge for 10 per cent of its fuel for next year would requires it to pay if crude falls below $112.
Fuel is now the single biggest expense at airlines, with United's 2007 fuel bill being $5 billion, which was bettered marginally by an $83 million hedging profit.
Hedging losses are not new to airlines, with Delta Air Lines Inc. having lost $108 million in 2006, Continental Airlines Inc. having lost $18 million in early 2007.
Southwest Airlines Co., the master of the fuel hedging game, has actually saved $3.5 billion on its fuel bill since 1999.
