In its 8-K Filing on 26th June 2012, Delta Airlines (NYSE:DAL) announced that it expects to realize a $155 million loss on its fuel hedges that settle in the June 2012 quarter. It also expects to record a $800 million non-cash mark to market adjustment on its fuel hedge position that will run through 2013.
To put the facts on the table, there is no futures contract for jet fuel. So, airline companies use heating oil futures and/or crude oil futures to manage the fuel price risk. Typically they would use complex algorithms and mathematical techniques to create an optimal portfolio that minimizes its fuel price risk. It is also a very common practice to use margin funding to add leverage to their hedged portfolio. And so very often, these hedges go bust, as they did in case of Delta. It is very likely that a number of other airlines too report such hedging losses.
In the early part of the year, with a war with Iran looming on the horizon, the price of oil looked all set to rise. But with that war not happening any time soon and a weakening global backdrop has lead to a collapse in oil prices. This sudden, dramatic and unforeseen drop has caused oil price hedges to sour, causing millions in losses to airline companies.
Here is a small table of facts that we collated from the annual reports of Delta Airlines:
In millions.
2011 | 2010 | 2009 | 2008 | |
Net Income profit/(loss) | $854 | $593 | $(1237) | $(8922) |
Fuel Hedge profit/(loss) | $420 | $(89) | $(1400) | $(65) |
Similarly, here is the same data for United Continental Inc (UAL)
In millions.
2011 | 2010 | 2009 | 2008 | |
Net Income profit/(loss) | $840 | $253 | $(651) | $(5396) |
Fuel Hedge profit/(loss) | NA. | $(119) | $104 | $(608) |
And, here is the same data for Southwest Airlines (LUV)
In millions.
2011 | 2010 | 2009 | 2008 | |
Net Income profit/(loss) | $178 | $459 | $99 | $178 |
Fuel Hedge profit/(loss) | $(64) | $(324) | $(408) | $1000 |
The hedging gains and losses as a percentage of net income raises the question if these airline companies should be considered airlines hedging their fuel price exposure, or hedge funds operating airlines.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
