US airlines are losing out on hundreds of millions of dollars in fuel savings because of a bet they made about the future of oil prices.
While carriers saved hundreds of millions of dollars from oil prices halving since June, they forfeited even bigger gains because of the fuel hedges they bought as protection against oil rising.
Most of those hedges, which allowed airlines to lock in gas prices over a fixed period of time, were sold at higher prices than current market values.
Three of the four biggest carriers — Delta, Southwest, and United — said this week they were rethinking their hedging tactics. American doesn’t hedge fuel costs and is therefore reaping the biggest savings.
Southwest Airlines said on Thursday that its outstanding hedges represented a loss of $1.8 billion through 2018 based on January 15 prices.
Southwest says it has exited some of its contracts so that 30% to 35% of its fuel consumption in the second half of 2016 is covered by fuel hedges, down from 60% to 70%. Chief Financial Officer Tammy Romo, did not reveal on an investor call how much the airline paid to rid itself of the hedges.
“While our hedging philosophy has not changed, our tactics have in this environment,” Romo said. “We will focus on catastrophic protection with no downside risk,” she added, referring to more expensive hedges that cap the price an airline will end up paying for fuel.
Delta Air Lines said on Tuesday it had exited hedge contracts for 2016 at a cost of $100 million to $200 million per quarter in. It forecast savings at $3 billion this year.
United Continental Holdings has not added new hedges since July and is evaluating its hedging program structure, acting CFO Gerry Laderman said Thursday on the airline’s investor call.
American Airlines Group, the world’s largest carrier said its fuel cost was $1.48 to $1.53 a gallon in the fourth quarter because it had not hedged fuel at all. That means American is paying around $0.30 less per gallon than Delta, United, and Southwest.