US jet fuel costs have fallen by a fifth this quarter. Don't be surprised if you don't see it in your ticket prices yet. US airlines aren't seeing it in their fuel costs yet, either.
There's typically a lag in spot trading price changes for commodities being felt at the pump. But the jet lag--pardon the pun--isn't just distribution. It's also hedging.
Airlines buy and sell futures, collars, calls and other financial instruments tied to actual jet fuel or much more liquid products like NYMEX heating oil or Brent crude oil.
They pay a premium to stabilize jet fuel prices, their biggest expense at more than a third of costs. In rising price environments, hedges save them money and give them an edge over the unhedged.
In falling price environments?
In earnings guidance June 26, Delta Air Lines projected the price of jet fuel for the April-June quarter at $3.37/gal compared with a earlier forecast of $3.28/gal. Delta cited a likely $155 million loss for fuel hedges settling during the second quarter. If another $800 million loss for future hedges is included, the fuel price would be $4.20/gal, the company said.
"The rapid decline in fuel prices resulted in a significant change in value for Delta's open fuel hedges, which run through 2013," Delta said. It added, however, that it expected fuel costs below $3/gal in the second half of 2012. On June 22, Delta closed on the purchase of the Trainer, Pennsylvania, refinery in a dramatic attempt to curb jet fuel costs..
In a note to investors, Dahlman Rose and Co. analyst Helane Becker said Tuesday that hedging jet fuel "has been a hot topic in 2012, as we have seen erratic movements in crude prices. We expect airlines which do not hedge jet fuel to say they are managing the businesses better, as they will not report hedge losses in this declining jet fuel environment."
US Airways, Frontier Airlines and, in a reverse of the norm, Southwest Airlines, had few hedges in place during the first half of the year.
Platts data showed that the US Gulf Coast market for spot trading, which is the most liquid among the US regions, started April assessed at $3.3186/gal and ended June 21 at $2.6146/gal, its lowest level since January 10, 2011. Airline costs may include taxes and other expenses above the spot trading price.
The 21% slide in the outright price of jet fuel came almost entirely from the underlying NYMEX heating oil futures, as jet fuel differentials--the difference between jet prices and the benchmark NYMEX price-- were mostly steady.
A fuel buyer for another major US airline said his company's hedging was fairly light, but any hedge program "takes it on the chin a little bit" with declining fuel prices.
Still, he noted most airlines are only about 30% hedged.
"So you will benefit a lot more when you have an $800 million good guy for oil coming down and $125 million bad guy on the hedge," he said. "Net-net, you're far better off."
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