Delta Air Lines has taken another hit on its fuel hedges, reporting a $450 million loss as fuel prices remained well below historical norms.
The carrier recently closed its hedge book after failing to make a profit from the practice since the second quarter of 2014. In a regulatory filing Tuesday, it said it lost $450 million on the early settlement of its remaining 2016 hedges.
Fuel prices “didn’t go nearly as high as Delta had anticipated, which made that hedge a loser,” CNN Money said. “So Delta pulled out of the fuel contracts, which cost the airline nearly half a billion dollars.”
As a result, Delta now expects a second-quarter operating margin of roughly 17%, below its prior projection of 21% to 23%.
With oil prices weak, The Wall Street Journal reports, Delta, United and other airlines have decided that the potential benefits from hedging may no longer justify the risks. Fuel costs are the industry’s second-largest expense after labor.
“When oil prices were rising, hedging often paid off for the airlines, helping them reduce their exposure to higher fuel costs,” the WSJ said. “But the speed of the 58% plunge in oil prices since mid-2014 caught the industry by surprise and turned some hedges into big money losers.”
Delta took a $2.3 billion loss on its fuel hedges in 2015 and CEO Ed Bastian recently said it had lost some $4 billion over the past eight years on hedges.
The company acquired a petroleum refinery in 2012 to control its fuel costs but according to Forbes, that was not an effective hedge because the refinery itself was subject to swings in the price of crude oil.
Nevertheless, the oil price slump has been an overall boon to the airline industry. In its last fiscal year, Delta gained $5.9 billion in pre-tax profit, driven in large part by falling fuel costs.
“Fuel prices are up 60% from their January lows, but they’re down 20% from a year ago,” CNN Money said. “So, even with the cost of canceling its fuel contract, Delta will save money on fuel … in the second quarter.”