Capital Markets

For UAL, Fuel-hedging Boon Turns Bane

A big benefit to airlines when oil prices climb, it hurt last quarter when prices plunged — to the tune of a $544m loss.
Stephen TaubSeptember 17, 2008

Fuel cost hedging — a boon for airlines that bet correctly during times of oil-price increases — was a bane for United Airlines parent UAL Corp. in the third quarter.

The company said it will report a $544 million quarterly loss, just from fuel hedging, as it marks to market the value of its hedging contracts. UAL said that it had $472 million in unrealized mark-to-market losses, along with $72 million in realized mark to market losses. On the other hand, it had an $8 million gain on settled contracts.

All open hedge positions at the end of the quarter are estimated to have a total market value of minus-$294 million, based on the forward fuel curve as of Sept. 15, UAL said in a regulatory filing. “The actual value will be determined based on market prices prevailing at the end of the quarter,” it added.

Since its peak in early July, the price in dollars of a barrel of oil has fallen about one-third, to the low-90s. Of course, that puts most other “hedging” airlines are in the same situation.

In the second quarter, UAL recorded net hedge gains of $238 million at the same time that its price for jet fuel was rising. In its filing in that quarter, UAL explained that it hedges a portion of its price risk primarily through collar options. The collars involve the simultaneous purchase and sale of call and put options with identical expiration dates.

For the company to obtain more-favorable terms for a portion of its hedge positions, it entered into collars with additional features, the airline explained. These hedge positions include extendable collars and collars that include twice the amount of put volume as call volume.

Going forward, UAL will benefit from paying lower oil prices.

As of June 30, though, the company said it had hedged 40 percent of forecasted third-quarter 2008 fuel consumption. And it had hedged 42 percent of forecasted fuel consumption for the fourth quarter.

Last month, UAL said that long-time CFO Jake Brace would retire on Nov. 1, and would be replaced by Kathryn Mikells, currently the company’s vice president of investor relations. Mikells started as a financial analyst in 1994.