Some of the benefits of cheap aviation fuel are being eaten away by hedging costs, a report today claims.
That is largely because certain US airlines have used common but risky hedging strategies, Reuters reported.
These include a “costless collar” – selling financial options that pay off when oil prices fall and using the proceeds to buy protection against soaring costs when prices climb.
Airlines including Delta and Southwest are rushing to finance losing bets on oil and revamp fuel hedges as tumbling crude prices leave them with billions of dollars in losses, people familiar with the hedging schemes said.
Oil is the biggest variable cost for airlines, often representing a third or more of their total operating expenses.
Airlines are among the top beneficiaries of a six-month slump that halved crude prices to five-year lows.
But with oil prices tumbling faster and further than expected, the collar hedges left the airlines with insurance against high costs they no longer need and on the hook for protection they sold against a further slide, with potential liabilities on the rise.
Southwest spokesman Chris Mainz said: “We continue to benefit from declining fuel prices.
“Obviously we’re going to move faster when the price drops in the 40% range. [Our fuel team] have been very busy actively managing our portfolio to respond to the changes we are seeing in the market.”
A Delta spokesman said the Atlanta-based carrier was not surprised by the slide, having been prepared to meet its financial obligations if needed.
Southwest, Delta and other carriers will benefit from the drop in oil prices because they hedge only a portion of the fuel they buy. Southwest, for example, expects to cover only 20% of its fuel consumption with hedge contracts this quarter.
Delta expects a $1.7 billion gain from lower fuel prices in 2015, despite $1.2 billion in estimated hedge losses.
Yet rival American Airlines, which has not entered any hedge contracts since late 2013, are set to see a greater boost to its bottom line.