UAL's Hedge Book Disaster

UAL corp. (UAUA) the holding company whose primary subsidiary is United Airlines, reported results for the Q4 and it lost a lot of money. Well it’s an airline and so who is really surprised? In reading the press release the company had a lot of standard airline descriptions relating to passenger seat miles and costs based on capacity. (Call Transcript)

Then the company tells you that it lost money primarily because the fuel hedges that it undertook went against it. It is not totally clear but the total cost of the hedges seems to have contributed approximately $1 billion dollars to the red. The company then goes on to say that it seems to be over and that these losses have been curtailed. Read this quote:

Kathryn Mikells, senior vice president and CFO said. "The cash impact, while significant, is now behind us, and we are well positioned to manage through a challenging 2009 with good expected cost performance building on our momentum from this past year."

OK that’s the CFO, she should know.

Then read note 10 to the financial statements.

....based on the hedge portfolio as of January 16, 2009...... at an illustrative $35 per barrel the Company's January 16, 2009, required collateral provision to its derivative counterparties would be approximately $780 million.

The reality is that UAL, as well as most other airlines, has become almost a pure oil play with the complicating factor of a hedge book that does not seem to be working in its favor. The hedge book is not transparent to the equity investor with the exception that they seem to be taking big hits constantly.

All we have is management’s comment that the losses from hedging seem to be over. We have no idea what the future hedge strategy is to be, if there will be one. The only certainty is that UAL does not know how to manage that risk and it will probably continue to bite them over and over again.

Comments

[ROLEX18K:]

What happened at UAL it also happened at 90% of airline companies, when the management is under pressure and their bonuses are melting, they don't care about workers or shareholders, they care only how to make their options "in the money" and they start to make one bad decision after other, when their hedging works in the beginning and bonuses turn into real money, the normal human instinct called GREED tells them to follow what works more and more till it explodes.
Look at how much money executives make, and how much their shareholders.
The executives salaries at all public companies must be regulated with maximum salary of 1,000,000$ a year for biggest multibillion companies, and bonuses and options must be stopped completely, IT IS STUPID to reward executives up front.
If some executive sees his company will do great, he can buy call options with his own money 1-3 years in advance.Why they have to get options with zero risk, when investors buying stocks and options risk everything.
STOP EXECUTIVES COMPENSATION!

Jan 22 05:24 AM

[AAppoorrair...:]

And which OIL COMPANY was Tilton chairman of before helping
out United???

Jan 22 07:54 AM

[Harvey Schultz:]

Gutowski's analysis is flawed (as is most of mainstream media). You can't take the hedge losses out of context. United chose to lock in its fuel prices at some level north (say $100) of today's oil price (say $40). They record today's price (the $40) as an operating cost, and the balance of what they promised to pay for fuel ($60) in "hedge losses". It is foolish to say that United does not know how to hedge. They are just following the nutty accounting rules. Where did Gutowski think oil prices were going to go when a barrel cost $149? If he really thought a barrel would cost $40 only months later, he should have shorted and would be so rich today he wouldn't need to write articles. Obviously he, like United, feared that prices would go even higher and thus airlines locked in whatever price they could. It is true that airlines are a pure fuel play because their highest cost is fuel. You could say that McDonald's is a pure agriculture cost play since food and paper cost is a significant part of their cost structure.

Jan 22 12:29 PM

[Ramani Exch...:]

Harvey, Gutowski isnt the one running UAUA, the executives at UAUA are. Their profession is to understand the economics behind their hedging strategies. The fact that they had no idea that a global slowdown was evident, when hundreds of bloggers have been calling it snce 2007, shows how incompetent UAUA is. Whatever price they hedged at, theyre not saying, and that doesnt bode well for their future prospects.

Throw in the fact that bookings are going down, and UAUA's enormous debt load, and UAUA is headed towards some more pain.

Jan 28 09:02 PM

[LMonkey:]

I heard that UAL is paying 17.5% on short term debt, this seems like alot...almost unsustainable. By the way, where do "the pundits" get a figure like 17.5% anyway ?

Jun 30 11:10 AM