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ExclusiveU.S.airlinesconfrontcheapoil'sflip
side:costlyhedges
Tue,Dec232014

ByCatherineNgaiandJeffreyDastin
NEWYORK(Reuters)SomemajorU.S.airlinesincludingDeltaand
Southwestarerushingtofinancelosingbetsonoilandrevampfuel
hedgesastumblingcrudepricesleavethemwithbillionsofdollarsin
losses,accordingtopeoplefamiliarwiththehedgingschemes.
Intheory,airlinesareamongthetopbeneficiariesofasixmonthslump
thathalvedcrudepricestofiveyearlows.Oilisthebiggestvariablecost
forairlines,oftenrepresentingathirdormoreoftheirtotaloperating
expenses.
Butnow,carrierssuchasDeltaAirLinesandevenSouthwestAirlines,
knownforasuccessfulhedgingprogramthatlockedincheapfuelprices
beforetheyroseadecadeago,seesomeofthebenefitsofcheapfuel
eatenawaybyhedgingcosts.
Thatislargelybecausetheyhaveusedcommonbutriskyhedgingstrategies,amongthema"costlesscollar":selling
financialoptionsthatpayoffwhenoilpricesfallandusingtheproceedstobuyprotectionagainstsoaringcostswhenprices
climb,accordingtothreepeoplefamiliarwiththeprograms.
Thetwocarriershavebeenmovingquicklytostrategisehowtomeetdemandsfrombrokersandbanksforadditional
collateraltocoverpotentiallossesfromastrategythatmadeperfectsensejustsixmonthsago,thosepeoplesaid.The
airlineshavealsoheldaseriesofmeetingsthatincludedairlineexecutives,brokersandconsultants,accordingtothe
people,whodeclinedtobenamedbecauseofthesensitivenatureofthediscussions.
Withoilpricestumblingfasterandfurtherthananyonehadanticipated,thecollarhedgeslefttheairlineswithinsurance
againsthighcoststheynolongerneedandonthehookforprotectiontheysoldagainstafurtherslide,withpotential
liabilitiesontherise.
SouthwestspokesmanChrisMainzsaidthemeetingswerepartofaroutine,althougharapidlychangingmarketcalledfor
closeattention.
"Wecontinuetobenefitfromdecliningfuelprices,"Mainzsaidinanemail."Obviouslywe'regoingtomovefasterwhenthe
pricedropsinthe40percentrange.(Ourfuelteam)havebeenverybusyactivelymanagingourportfoliotorespondtothe
changesweareseeinginthemarket."
DeltaspokesmanTreborBanstettersaidtheAtlantabasedcarrierwasnotsurprisedbytheslide,havingbeenpreparedto
meetitsfinancialobligationsifneeded.
BOONTORIVALS
Southwest,Deltaandothercarriersthatsourcesdeclinedtoname,willbenefitfromthedropinoilpricesbecausethey
hedgeonlyaportionofthefueltheybuy.Southwest,forexample,expectstocoveronly20percentofitsfuelconsumption
withhedgecontractsthisquarter.
Deltaexpectsa$1.7billiongainfromlowerfuelpricesin2015,despite$1.2billioninestimatedhedgelosses.
YetrivalAmericanAirlines,whichhasnotenteredanyhedgecontractssincelate2013,aresettoseeagreaterboosttotheir
bottomlines.
Industryconsultantssayhedgedairlineshaveafewchoicestodealwiththepriceslide,includingsellingforwardpositions
oncrudeoilorjetfuel,changingthepricesatwhichtheyhedgeorsellingassets,suchasplanes.
Whatairlinesexactlyplantodoremainsunclear,peoplefamiliarwiththediscussionssaid.
Alackofdisclosurerequirementsmakesitalmostimpossibletotellhoworwhenairlineshavehedged,andnonewould
discussdetailsoftheirstrategies.
Collartransactionslookedwellsuitedtothemarketwhenpriceshoveredaround$100perbarrelformostofthepastfour
years,allowingairlinestocaptheirfuelcostsatlittleornocost,analystssaid.
"(Costless)collarsareaneffectivestrategythatworksbestwhenpricesstaywithinarange,"saidJohnSaucer,vice
presidentofresearchandanalysis,atMobiusRiskGroup."Butitbecomesaverydifferentanimalwhenthemarketgoes
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againstthat."
IntheirOctoberquarterlyfilings,SouthwestandDeltasaidtheyusedamixofoptionsandfixedpriceswaps.
Southwestalsoexplainedthatcollartrades"carrymoreriskthanpurchasedcalloptions"becauseofpossiblygreaterliability
whenthecontractsexpire.
Theworld'sbiggestlowcostcarriersaidthata25percentdeclineofcrudepricesfromSept.30wouldprobablyforceitto
pay$615millionincashcollateral,aircraftcollateralandlettersofcredit.
Deltasaiditwouldpay$800milliontocounterpartiesifoilfell20percentbetweenOct.1,2014andDec.31,2015.Brent
alreadyhastumbled36percentsincethentotradeatabout$60abarrelonMonday.
Thesehedgesweighonthecostsoftheirfuturefuelconsumption,too.
Atcurrentprices,Southwestsaysitexpectstokeeponlyabout80centsofsavingsforevery$1inoilpricedecline,while
Deltaputsthisfigureatabout65cents.Americaninsteadwillreapthefullbenefitofcheapfuel.
Andeverycentcounts.Deltahassaidthatonecentchangeinthepriceperbarrelofoilisworth$40milliontothecarrier.
(ReportingbyCatherineNgaiandJeffreyDastininNewYorkEditingbyTomaszJanowski)
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