Viewpoint: US airlines less hedged through end of 2016

OREANDA-NEWS. August 29, 2016.  Many US airlines have chosen to hedge less of their fuel through 2016 as lower prices encourage spot market exposure.

Hedging strategies vary for the airlines, ranging from no hedges to hedging 12pc to 50pc of fuel consumption for the rest of the year. Weaker year-on-year fuel prices — and volatility that fueled some hedging losses — has led many airlines to opt for the lighter hedge books for now.

US jet fuel prices at the US Atlantic coast averaged about \\$1.316/USG during the second quarter of 2016, down about 28pc from where they stood during the same quarter last year. Prices on the Gulf coast were down about 27pc, falling from \\$1.76/USG to \\$1.27/USG this year, while midcontinent prices fell about 24pc, from \\$1.82/USG to \\$1.38/USG.

United Airlines reported a hedging loss of \\$35mn in the second quarter. For the remainder of 2016 United has only hedged about 12pc of its projected fuel requirements, which makes up about 6mn bl.

Delta Airlines dropped its 2016 hedges completely after reporting hedging losses totaling \\$614mn, including a \\$450mn charge to exit hedges early in the quarter.

Also dropping hedges is American Airlines, which blames price volatility for the decision.

"The biggest reason to not hedge fuel is because it's a rigged game that's impossible to beat," American Airlines president Scott Kirby said during a second quarter earnings call. "Fuel prices most of the time are trading at contango. So while fuel is \\$47 a barrel today,if we try to buy fuel for a year from now, it's well north of that."

Not all airlines are moving away from hedges. During the second quarter JetBlue did not have any hedges in place, compared to 19pc for the second quarter 2015. Going into the third quarter JetBlue has about 24pc of its fuel hedged and about 26pc hedged for the fourth quarter.

Southwest Airlines said it has hedged about 16.95mn bl of its fuel consumption for the remainder of 2016, while Alaskan Air Group has hedged about 50pc of its projected fuel requirements for the remainder of 2016.

Some Airlines have started hedging projected fuel consumption into 2017 and 2018. Southwest said its hedged about 285.714mn bl for the 2017 year, and about 18.6mn bl of jet fuel for 2018. Alaskan hedged about 25pc of jet fuel for the full year of 2017.

Fuel prices are expected to increase, but would still be weaker year-on-year. Southwest expects third and fourth quarter fuel prices to be about \\$2.05/USG, bringing the full-year estimate to the \\$1.90/USG and \\$1.95/USG range.

Spirit Airlines said it expects fuel prices in the third quarter to be between \\$1.52 and \\$1.57/USG, which is down 15pc from the prior year, Delta's executive vice president and cheif financial officer Paul Jacobson said during the second quarter earnings call.