United's Fuel Hedges are Underwater

Rising fuel prices don’t always bring good news for airlines, though I’d argue that yesterday’s news is not nearly as bad as others may make it seem. United said yesterday that its hedges were underwater by millions of dollars this quarter. In other words, they’re paying more for their hedged fuel than they could theoretically pay on the open market. So why is it that I say this isn’t necessarily bad?

Don’t get me wrong. If United could only hedge when they knew fuel would go up, they’d be happy to do so, but that’s obviously not how it works. Airlines are at the mercy of rising or falling fuel prices when they don’t hedge, but hedging allows airlines to at least get a handle on their costs and make them more predictable. Sometimes, that may mean paying more for fuel, but it still offers predictability and that’s important.

Some people say that airlines should not be allowed to do this. Douglas McIntyre says at BloggingStocks.com:

The news raises the question of whether airlines should be allowed to hedge at all. It may improve their costs of fuel, but it also could cause losses on top of the ones they are suffering because of jet fuel prices and falling traffic.

United would say that being in the business of gambling on oil prices is good business. Hedges can offset fuel costs. But, the airline has proved that the system is hardly fool-proof.

But this argument can’t be serious. If an airline feels comfortable hedging a certain percent of fuel at the prevailing prices, then only the finance department can decide if that’s the right move or not. In this case, United isn’t looking likely to come out on top (unless fuel prices spike again soon), but at least they were able to have some control over their costs. It’s always a gamble, but that doesn’t mean it’s not smart.