The new American Airlines may trim the jet fuel hedges off

Sometimes airlines are just like any neighborhood.

If all your neighbors have a dream car (or Dreamliner), you’ll want one, too. If all your neighbors have internet access (at 30,000 feet), you’ll want it, too. If all your neighbors have hedges for their yards (or jet fuel), you’ll want that, too.

So what’s the latest neighborhood gossip? It’s whether the new owner of the biggest house (airline) on the block (in the world) is going to try and keep up with the Joneses. At least when it comes to those hedges.

Airline industry sources say this week’s naming of a new management makeup looks likely to take the merging American Airlines out of the hedging market, a significant means for airlines to attempt to control the rising cost of jet fuel.

Creditors, regulators, bankruptcy judges and others still must review the proposed merger between US Airways and American, so it is far too soon to determine the combined airline’s hedging policy.

But US Airways CEO Doug Parker already had been named new CEO. More key managers were named this week, including US Airways President Scott Kirby as the new president, and two other US Airways officials who were part of a committee that has steered US Airways away from any hedging since 2008 when a bad bet almost bankrupted the company.

(A US Air official discussed the company’s view on hedging at a Platts conference in 2010.)

American, on the other hand, follows the more traditional airline route of smoothing out jet fuel costs by paying for instruments such as calls and collars against future jet fuel, heating oil or crude oil contracts.

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Industry analyst Helane Becker of Cowen Securities has suggested the combined airline would no longer hedge jet fuel costs as American’s systemic hedging program rolls off the books. The companies have few overlapping routes, so hedging would be the biggest change in their jet fuel operations, she said.

Sources in the jet fuel market said much the same.

“I tend to think they will need to do some amount of hedging due to the new combined size,” said a jet fuel trader. “But US Air does seem to have more force on the fuel approach.”

The US Airways team does not feel hedging has tremendous value, especially given current tight capacity where costs can be easier passed on to customers than in the past, said a second source, who has knowledge of both companies’ fuel management programs.

“To me that’s a healthier model than to be hedging all over the place,” he said. “I think it would be a break from the pack.”

A fuel buyer for a competing airline said the pack once feared a stock price hit if they veer too far from hedging and other measures in an attempt to contain what has become the industry’s largest single cost.

But he said Delta Air Lines has only seen its stock price rise despite buying a refinery–essentially a hedging move–and adjusting hedge accounting methods. Investors also have rewarded US Airways in recent years. He said any industry nervousness about abandoning hedges could disappear if American does so with little penalty.

He cautioned that not hedging is also taking a position and “it’s easier to get away with it when you’re US Air” and not so big. Still, hedging is expensive and not hedging “may be the right answer. They have the people in place that can make that call,” he said.

(For a look back on hedging policies, see this Barrel blog entry from about a year ago.)

US Airways officials have stressed the company does not actually have a unilateral “no-hedging” policy, but has an active hedging committee that meets regularly and reviews competitor hedges and whether pricing power was going to erode to a larger degree than the cost of hedging.

Airlines can raise ticket prices or add surcharges to pass along fuel costs, but they often would rather hedge to control the expense and also make sure it does not go out of whack with competitors.

Southwest Airlines and Alaska Airlines are said to be the major US airlines with deep hedging out two years or more, as most US airlines have a third to a half of their fuel costs hedged a year out. The source close to the companies said that means American would not have to hold out for long if their neighbors have an advantage.

“Everybody else is going to be a fleeting benefit,” he said. “If fuel prices do shoot higher, the reality is those hedges burn off.”

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  1. Ethosav Aircraft at October 8, 2013 6:38 am

    Great discovery.. Really appreciable..


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