US Airlines Return To Fuel Hedging

At least two US airlines have started hedging their fuel costs after a months-long pause, with mixed results.

Southwest Airlines and United Airlines have added new hedges against a rise in oil prices just months after bets last year cost them hundreds of millions of dollars. With US crude prices falling 21 percent since early June, Southwest appeared to regret the decision.

"We were concerned that market prices would continue to escalate, so we did add some positions for the second half of this year," Southwest's chief financial officer Tammy Romo said.

At July 20 prices, those hedges will cost Southwest USD$308 million when they settle this year. Southwest said its hedge book to 2018 is USD$1.3 billion in the red, although that could change if prices rise.

Contracts now cover 40 percent of its expected fuel use in 2016 and 2017, up from 10 percent and 30 percent covered, respectively, as of April.

"We're mostly focused now on working our current position off, burning that position off in the most cost-effective way," chief executive Gary Kelly said.

Cheap oil has been a boon to airline profits, typically offsetting hedge losses because fuel comprises about a third of airlines' operating expenses. Southwest earned USD$608 million last quarter, and United posted a USD$1.19 billion profit.

While hedging can insure against rising fuel costs as it did for Southwest a decade ago, in recent months carriers that did not hedge such as American Airlines have emerged as winners.

The oil glut, which depressed prices more than 50 percent since June 2014, resulted in hedged airlines paying out to parties on the other side of the bets and exit contracts before more losses piled up.

When prices crept up this spring, locking in fuel prices again seemed smart until July trading reversed the rise.

United has begun building a "small" hedge for 2016 and will be "opportunistic" when considering more, its finance chief John Rainey said.

By contrast, Delta has not "materially" changed its hedges since February, chief financial officer Paul Jacobson said last week.

"We've been kind of sitting back, watching the market," he said.

Losses from old hedges are expected to cost United and Delta more than USD$200 million each this quarter.