Airlines that hedged on fuel prices emerged winners in Q2
Demand for air travel hit pandemic highs — and in some places historic highs — during the second quarter. Airlines reported record revenues and full planes as issues from staffing to weather and an elevated number of employees out sick with Covid kept capacity constrained. Sounds like a recipe for financial success, right? Well, there’s the matter of fuel. The average price per gallon for U.S. Gulf Coast jet fuel reached a record $4.12 in March, up from $1.86 per gallon a year earlier — a more than two-fold increase — according to the U.S. Energy Information Administration. Some airlines, though, had a secret weapon: fuel hedges. Southwest Airlines is one example. It paid just $3.36 per gallon for its fuel last quarter, a big reason why it produced the best second quarter operating margin — 17% — of any airline worldwide that’s reported thus far. Hedges behave like insurance contracts. In Southwest’s case, it expects to pay what’s essentially a two-cent per gallon insurance premium this quarter. But at current spot prices, it expects to collect a cash settlement of 46c per gallon. As of July 28, Southwest had 59% of its Q3 fuel needs hedged, with contracts currently holding a market value of about $235m, far above the $13m in premiums the airline paid. Alaska Airlines was not quite as well hedged but had enough protection to also pay below $4 per gallon for fuel last quarter. The same was true for Delta Air Lines, which benefited from its ownership of an oil refinery near Philadelphia. Most other US airlines, burned by fuel hedges in years past, largely refrain from hedging today. <br/>
https://portal.staralliance.com/cms/news/hot-topics/2022-08-08/general/airlines-that-hedged-on-fuel-prices-emerged-winners-in-q2
https://portal.staralliance.com/cms/logo.png
Airlines that hedged on fuel prices emerged winners in Q2
Demand for air travel hit pandemic highs — and in some places historic highs — during the second quarter. Airlines reported record revenues and full planes as issues from staffing to weather and an elevated number of employees out sick with Covid kept capacity constrained. Sounds like a recipe for financial success, right? Well, there’s the matter of fuel. The average price per gallon for U.S. Gulf Coast jet fuel reached a record $4.12 in March, up from $1.86 per gallon a year earlier — a more than two-fold increase — according to the U.S. Energy Information Administration. Some airlines, though, had a secret weapon: fuel hedges. Southwest Airlines is one example. It paid just $3.36 per gallon for its fuel last quarter, a big reason why it produced the best second quarter operating margin — 17% — of any airline worldwide that’s reported thus far. Hedges behave like insurance contracts. In Southwest’s case, it expects to pay what’s essentially a two-cent per gallon insurance premium this quarter. But at current spot prices, it expects to collect a cash settlement of 46c per gallon. As of July 28, Southwest had 59% of its Q3 fuel needs hedged, with contracts currently holding a market value of about $235m, far above the $13m in premiums the airline paid. Alaska Airlines was not quite as well hedged but had enough protection to also pay below $4 per gallon for fuel last quarter. The same was true for Delta Air Lines, which benefited from its ownership of an oil refinery near Philadelphia. Most other US airlines, burned by fuel hedges in years past, largely refrain from hedging today. <br/>
