Airlines are scaling back from hedging due to poor oil price
Airlines are now retiring from hedges after being hurt by low fuel prices. The industry has been pumping in huge capital into hedges to sustain price rise in the oil market. Airlines were financially backed by some hedges that aided them to manage higher oil prices.
However, the 58% drop in crude prices since the middle of 2014 has pushed hedge market into a draconic loss, leading airlines to shy away from hedges. In 2015, Delta Air Lines lost $2.3 billion in hedges, while United Continental Holdings recorded a hedge loss of $960 million. Contrastingly, American Airlines Group that bailed out from hedging in 2014 enjoyed the cheapest energy than its peers in the industry.
According to Scott Kirby, president of American Airlines, hedging is like an assembled game, which enhances the US stock market. Currently, airlines are re-examining the use of intricate derivatives to suppress fuel expenses. With the fall of oil prices, hedge investments seem less appealing to the industry. Both, United Continental and Delta Airlines have zero hedges for the coming year. US airlines like Spirit Airlines and JetBlue Airways have been slashing their hedges as investments into hedges no longer suppress risks associated with fuel price, THE WALL STREET JOURNAL reports.
Most interestingly, even Europe carriers that have been huge supporters of hedging are attempting to stay away from hedging. Gerry Laderman, acting CFO of United Continental, said "We don't need to hedge that risk like we used to. That doesn't mean that hedging is off the table. We are looking at formulating...a different way of thinking about it."
Meanwhile, Brent crude LCOc1 dropped 41 cents and traded at $40.79 per barrel after rising to $42.45 in the previous week over the hope that OPEC members might maintain their January supply level. But, oil prices dropped on Monday fuelled by increased oil rig counts in the US as well as volatility in the OPEC summit. Oil producers in the US surprised the market by adding an additional oil rig after a reduction period of 12 weeks, as reported by Reuters.
Delta Airlines expects to record additional hedge losses between $100 million and $200 million in the final nine-month period of 2016. But still the airline expects poor oil prices to trim its 2016 fuel expenses by $3 billion from the previous year. Energy prices that reached its peak at $147 per barrel in 2008, are now rotating at roughly $41 per barrel. Some market experts look at the recent price rally as a move that will further stimulate output in the near future.
benzinga quoted a survey report conducted by Credit Suisse, which revealed that over 61% of hedge fund respondents hope that airline stock will outstrip the entire market in the coming year. These respondents consider poor revenue growth in business units as the main issue impacting the industry stock.
In hedging, airlines signs financial deals, which become more fruitful as energy prices increase. Hedging helps airline industry to balance other corporate expenses. However, hedging fails when the oil prices fall, leaving the industry in huge losses.