Back when oil was trading in the $130s, I read a story about airlines, specifically UAL (and maybe AMR as well) hedging their fuel costs at those high prices. I thought to myself at the time, “Well that must certainly be the top in oil”. Here’s some details about their hedging reported in the last quarter earnings press release:

As of July 21, the company had hedged approximately 44 percent of its estimated 2008 third quarter mainline fuel consumption, of which approximately 34 percent is through three-way collars with upside protection beginning on average at a crude equivalent price of $111 per barrel and capped at $127 per barrel, with payment obligations beginning on average at a crude equivalent price below $107 per barrel. The remaining 10 percent is hedged through collars with upside protection beginning at an average crude equivalent price of $111 per barrel with payment obligations on average beginning at crude equivalent price below $100 per barrel.

 

As of the same date, United had hedged 47 percent of its forecasted mainline fuel consumption for the fourth quarter of 2008, of which 29 percent is through three-way collars with upside protection on average beginning from $113 per barrel and capped at $134 per barrel with payment obligations on average beginning if crude oil drops below $107 per barrel.  The remaining 18 percent is hedged through collars with upside protection on average beginning at a crude oil equivalent price of $109 per barrel with payment obligations on average beginning if crude oil drops below $99 per barrel.

Now those hedges have come home to roos (via the WSJ)t:

United Airlines said its fuel hedges are underwater by $544 million.

Like other airlines, the nation’s second-largest carrier has been aggressively hedging its fuel expenses, which had seemed to be rising without respite. But oil prices have declined since peaking at $147 a barrel this summer, down to less than $94 a barrel on Wednesday.

In a Securities and Exchange Commission filing, United estimated its hedging loss through the end of the month based on Monday’s predicted fuel prices. The projection included $72 million in realized losses and an additional $472 million in unrealized losses.

Apparently Southwest Airlines is the only American carrier with intelligent management.

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