American Airlines and Allegiant Air each had something to crow about when announcing
their 2014 fnancial results and providing
guidance for 2015. Te US carriers—a
global full-service giant and a leisure-oriented domestic operator—have little
in common, but they do share one commonality that is currently paying of: Both
airlines’ executive management teams are
philosophically opposed to fuel hedging.
As a result, American and Allegiant
are fully beneftting from the steep drop
in oil prices in recent months, something that can’t be said for many airlines
around the world that are tied to suddenly expensive fuel hedging contracts.
Fuel hedging has long been a standard
practice in the airline industry, often
insulating carriers—notably Southwest
Airlines—from big price jumps in the
volatile oil market. But when fuel prices
take an unexpected plunge, hedging
airlines can get caught paying above-
market rates for a large portion of their
fuel needs. Case in point: Delta Air
Lines took a $1.2 billion charge in the
2014 fourth quarter for mark-to-market
adjustments on fuel hedges settling
in future periods. Consequently, the
Atlanta-based company incurred a $712
million net loss in the December quarter.
Hedging meant Delta was unable to fully
realize the benefts of a 14% year-over-year drop in the quarter’s average price
per fuel gallon to $2.62.
To American and Allegiant, Delta
and other carriers got burned by playing
a speculative game that is outside the
expertise of airline executives. Fuel hedg-
ing “just doesn’t make sense,” American
CFO Derrick Kerr said. “Somehow
you’ve got to convince yourself that you
know better than the oil market experts.”
Las Vegas-based Allegiant, the ultra
low-cost carrier specializing in fights
from smaller US cities to US vacation
destinations, has been proftable for
every quarter for 12 consecutive years.
Allegiant chairman and CEO Maurice
Gallagher told analysts that fuel hedging
is “not our business. It’s speculation. We
don’t understand it. We try to keep it
Playing the Hedging Game
When oil prices plunge, speculating on fuel can be a costly bet for airlines.
BY AARON KARP