The tumbling price of crude oil is a boon for the airline industry, but it’s not a complete victory. Airline profits are facing some constraints because of prior deals the carriers made to shield themselves from the exact opposite of what’s happening now. It’s common for carriers to “hedge” their fuel costs, essentially buying insurance to protect against future cost spikes.
Hedging was a successful tactic in the past, as the cost of oil surged. But now that oil has lost more than half its value since the summer, the strategy is eating into earnings. Delta Air Lines took a $1.2 billion charge last quarter related to its fuel hedges, for example, and it’s not alone.
Analysts highlight Southwest Airlines in particular. It is partially hedged through 2017, while Delta, United Continental and others have hedging contracts in place only for this year. Southwest reports its fourth-quarter results Thursday.
American Airlines, meanwhile, doesn’t have any hedges in place. That’s an advantage if oil remains low, as fuel can make up a third of an airline’s total operating costs.
To be sure, the positive effect of falling oil outweighs any headaches tied to hedging. Delta, for example, says that it expects more than $2 billion in fuel savings this year, and many analysts expect cheap fuel to lead to further gains for airline stocks. Their ascent just may not be as big as it could have been.Associated Press