Ten airlines combined to lose $4.65 billion on fuel hedging this year. Half of the losses belong to Lufthansa and to British Airways parent IAG. Germany bailed out a financial derivatives trading firm, as much as an airline.
The intertemporal carry trade was potentially extremely lucrative when some oil prices went negative, but there was only a very limited number of companies in the world that could benefit from it. Those negative prices were for near-term delivery of oil. Prices went negative because speculators risked having to take actual delivery of the oil and were forced to pay big premiums to exit their positions. It’s only those companies in a position to store crude that could win on that trade.
There were plenty of calls for airlines to hedge as oil prices dropped during the pandemic, but remember that airlines:
- Would actually be paying a higher price for later-delivery contracts
- Would have to pay the cost of the contracts themselves, or reduce their upside with corresponding additional trades to generate financing
- Had to have some sense of how much fuel they could actually use but were facing unprecedented uncertainty over future schedules
- Could lose out on opportunities for oil to go lower, or even stay the same without the extra hedging expense
Copyright vanbeets / 123RF Stock Photo
Southwest long benefited from its fuel hedges, until they didn’t, and when they didn’t it was evil GAAP accounting’s fault. Southwest has lost up to a billion dollars on fuel hedges in a year.
When United lost over half a billion dollars in a single quarter on fuel hedges in 2008 they decried the evils of oil speculation with no irony whatsoever. And they continued their fuel hedging – badly.
US Airways management has stayed out of the hedging game since 2008 and brought the same philosophy to American. Instead of ‘locking in the price of fuel’ they’ve said they believe ticket prices move in tandem with fuel prices so when fuel prices rise they’re best able to meet that expense. To be sure they’d be better off with a good hedge, but that begs the question. Not hedging avoids the bad hedges.
Four years ago Delta’s Vice President of Fuel was even caught front running his own trades and pocketing $3 million in his wife’s account.
The relevant question is does any given airline have a strong commodities trading capability? Or do they just think that they do? There are real expert traders who do nothing else who get killed on this as often as they don’t.