United Airlines (UAUA) today reported a fourth-quarter loss of $176 million, EPS -$1.05, compared with average estimates of an EPS of -$1.47. The reported loss excludes gains from fuel hedging and accounting charges of about $65 million.
Delta Airlines (DAL) yesterday reported a net loss of $25 million and EPS of -$0.27, excluding costs related to its merger with Northwest Airlines and other items. Analysts had expected net EPS of -$0.24. Considering that Delta lost $1.4 billion in the fourth quarter of 2008, these results reflect a big improvement.
Delta excluded $1.4 billion in fuel hedge losses from its full-year results, while United excluded full-year, non-cash mark-to-market fuel hedging gains of $586 million.
Southwest Airlines (LUV), which reported results last week, reported a full-year hedging loss of $9 million. The three airlines have outlined their fuel hedging strategies for 2010, and the differences are interesting and instructive.
In the fourth quarter of 2009, Southwest’s fuel costs came in at $2.29/gallon including fuel taxes. United’s fuel costs totaled about $2.04/gallon, and Delta’s came in at $2.17/gallon.
Southwest has hedged about 50% of its estimated 2010 fuel consumption at prices up to $100/barrel. The company also reduced its hedging to 20% of estimated consumption if prices settle in the $100-$120/barrel range, but is hedging about 40% of estimated consumption at prices above $120/barrel. This nets out to an estimated fuel cost of about $2.35/gallon for the first quarter of 2010.
United has hedged 70% of estimated first quarter fuel costs at an average price of $75/barrel, and capped full-year estimated consumption at an average price of $77/barrel. If prices fall below these positions, United benefits from its 80% downside participation. United’s hedges are approximately 50% call options and 50% swaps.
Delta has hedged 47% of its estimated first-quarter fuel consumption at an average price of $67/barrel, using a combination of call options, collars and swaps. The company expects first-quarter fuel costs to be $2.22/gallon. Delta’s has hedges in place for 31% of second-quarter estimated consumption, 11% of third-quarter consumption and 3% of fourth-quarter estimated consumption.
Southwest buys more insurance than either Delta or United against rising fuel costs, therefore it’s per gallon fuel costs are higher. That strategy paid off for Southwest when fuel costs skyrocketed in 2007. The company’s total fuel bill for 2009 topped $3 billion, so $9 million for insurance is a good investment.
Delta’s fuel costs for 2009 totaled about $7.4 billion, but its hedges cost it $1.4 billion. United’s total fuel costs for 2009 came in at about $4.3 billion, including its regional affiliates and the company’s $586 million non-cash gain on hedges.
What all hedging strategies have in common going forward is the belief that fuel costs will rise. The question, then, is not how much prices will rise, but how fast will they rise. Southwest chooses to guard against a very rapid rise, while Delta and United foresee a slower rise and choose to pay less for insurance. These are the choices, and the winner will be announced later.
