This is from today’s WSJ, “Airlines Pull Back on Hedging Fuel Costs” (http://www.wsj.com/articles/airlines-pull-back-on-hedging-fuel-costs-1458514901)
“Last year, Delta Air Lines Inc., the nation’s No. 2 airline by traffic, racked up hedging losses of $2.3 billion, while United Continental Holdings Inc., the No. 3 carrier, lost $960 million on its bets.
Meanwhile, No. 1-ranked American Airlines Group Inc., which abandoned hedging in 2014, enjoyed cheaper fuel costs than many of its rivals as a result. “Hedging is a rigged game that enriches Wall Street,” said Scott Kirby, the airline’s president, said in an interview.”
Me: It has not been easy… Many airlines used WTI futures to hedge international fuel costs only to see the WTI/Brent spread widen out to around -$25 (WTI under Brent) in 2011.. After switching hedges to Brent futures, of course the spread moved back in line (did they understand basis risk?)… And, during 2008, some airline hedges worked well during the first half of the year when prices reached $140, but later that year, WTI traded down to $35… And, many investment banks sold complicated volatility trades to airlines in which the “hedge” was actually a short vol trade…
Also, the long hedge for airlines could be a disaster if we go into a recession… Losing on the fuel hedge (assuming fuel prices go down in a recession) at the same time passenger miles decline is not a good combination… There is also the issue of what your competitors do… If an airline decides not to hedge and fuel costs decline, they could win market share by passing fuel savings to passengers by lowering ticket prices… Perhaps airlines should only hedge tickets that have already been bought when there is no longer flexibility to change ticket price…
Back to the WSJ:
“Delta, which bought its own refinery in 2012 to control some of its supply, recently closed its hedge book. It expects to book further losses of $100 million to $200 million in each of the final three quarters of this year.”
Is there a better indicator that the bottom is in?
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