Delta Loses Bet of $450 Million on Price of Fuel
The airline, based in Atlanta, locked in purchases of fuel in a contract referred to as a hedge. The levels were above the market value betting that the prices of jet fuel would go up.
In fact the prices did rise, only they did not increase to the level Delta was anticipating, which caused the airline to lose on its hedge.
Therefore, Delta pulled out of its contracts for fuel that cost it close to half a billion dollars. On Tuesday, during trading after midday, Delta shares had fallen 4%.
However, not all the news is bad for Delta, Prices of fuel are 60% higher now than during the lows in January, but are down from one year ago by 20%.
Therefore, even with the cost the airline occurred due to cancelling its hedge contract for fuel, Delta would be saving money on purchasing fuel, which was the airline’s second biggest expense, during the second quarter.
Delta was hit even bigger on its hedges in 2015. According to filings by the company, it lost $2.3 billion on last year’s hedges, as the price of fuel fell during the entire year.
The airline lost yet $274 million more on hedges this year during the first quarter. Other airlines besides just Delta have taken hits due to fuel hedges.
United Continental lost over $604 million in 2015, In March, Southwest said in a SEC filing that there was the possibility it would lose over $1 billion on hedges over the upcoming years, after it has already lost $254 million during 2015.
The majority of airlines buy hedges as a way to protect themselves from an unexpected spike in prices of fuel. American Airlines is the only airline out of the four largest carriers in the U.S. that does not deal with any fuel hedges.
Executives at American have said in the past that hedges are not a good bet.
It is expected that there could be some leveling off or stabilizing of crude prices which could help to stabilize the jet fuel price making the hedges bets less important to airlines of the price can remain flat.