Fuel hedging sure gamble for airlines

Published 5:00 am Thursday, September 21, 2006

With oil prices on the decline, fuel hedging – or the pre-purchasing of fuel at a fixed price – has proven to be less than profitable for one national airline with Central Oregon ties.

However, both air carriers directly serving Redmond Airport, Horizon Air and SkyWest Airlines, are relatively unaffected, officials from those airlines said.

The practice of fuel hedging is popular in times of rising oil prices. An airline that hedges buys a percentage of its fuel for future needs at current prices, essentially betting that fuel prices will climb. The goal: guess correctly and save money.

”In essence, fuel hedging is like an insurance policy that reduces some of the risks of negative financial impacts possible from volatile fuel prices in the market,” said Amanda Tobin Bielawski, media relations manager with Alaska Airlines and Alaska Air Group, Horizon’s parent company.

Fuel hedging, however, could be risky. In times of falling prices, pre-purchasing could mean that airlines buy gas at higher costs than they would otherwise pay later.

Such is the case with Chicago’s United Airlines, which locked in 28 percent of its mainline fuel costs in the third quarter in hedges at about $69.84 a barrel.

With crude prices dropping to $61 a barrel Wednesday, United is paying more for hedged fuel than what it would have paid in the current market.

United flies to and from Redmond via its Express service, which is operated by SkyWest.

Brandon Borrman, a United spokesman, declined to comment on how much the fuel hedging program is costing the company. He did note, however, that the airline continues to purchase 72 percent of it fuel in the open market, providing significant savings for United.

”The savings we’re realizing from the low fuel costs far outweigh the cost of our hedging,” Borrman said.

United has not released its future fuel hedging plans beyond the third quarter.

Another national airline with Central Oregon ties, Atlanta’s Delta Air Lines, saved $2 million in the second quarter this year from fuel hedging, said spokesman Anthony Black.

But the company is in similar shoes as United in the third quarter, when 34 percent of Delta’s fuel is hedged at $2.13 per gallon, or $66.03 a barrel.

For Horizon Air and parent company Alaska, fuel hedging has proven profitable because of an earlier commitment to the program. The Seattle-based group started its current wave of fuel hedges in 2000, when crude prices hovered around $30 a barrel.

Last year, the airline saved about $125 million from fuel hedging, media relations manager Tobin Bielawski said. The group hedged 46 percent of its fuel in the third quarter at an average of $43 per barrel, and 26 percent of the airline’s fuel is already hedged at $53 a barrel.

St. George, Utah-based SkyWest does not participate in fuel hedging, said company spokeswoman Sabrena Suite.

Rather, the airline operates United and Delta flights on pre-negotiated flat rates regardless of passenger load numbers, and the fuel cost for those national airlines is one of the many factors affecting how much SkyWest is paid.

”We don’t fuel hedge, but we have that built into our contracts,” Suite said. ”What’s good for our partners is good for us.”

One airline industry expert compared fuel hedging with other forms of open-market investments, noting that United’s and Alaska’s experiences highlight the fact that the practice is a double-edged sword.

”Buying shares on the stock market (is) the same thing,” said Aaron Gellman, a professor and former director of Northwestern University’s Transportation Center in Evanston, Ill., who is an expert in the airline industry. ”(Fuel) is a commodity.”

Gellman said fuel hedging has been in practice for more than 30 years, and mixed results are the norm.

He added that airlines need to be prudent in deciding when to commit on a fuel price, adding that the large oil field recently discovered in the Gulf of Mexico may mean that now’s not the best time to hedge.

”Anyone who studies the petroleum industry is not surprised that the prices are dropping,” Gellman said. ”And I expect it to fall for the next 18 months.”