US airline fuel hedging Part 1: United, Delta fight to reduce losses. American enjoys hedge-freedom

There is no doubt airlines worldwide are benefitting from drastically lower year-on-year fuel prices, with lower oil costs driving much of the profitability enjoyed by US airlines. But the sudden drop in fuel costs that began in the latter part of 2014 resulted in some airlines being bitten by their hedge portfolios as the rapid slide in prices resulted in ample losses from some airline hedging programmes.

Two of the large US global network airlines - Delta and United have recorded losses from their hedge books in 2015 and are attempting to mitigate further damage. American, which opts not to engage in fuel hedging, is enjoying the full benefit of lower fuel costs without the difficulty of attempting to adjust a complex hedge portfolio to stave off losses triggered by the drop in fuel prices.

No-one can predict how long fuel prices will stay at their current levels; but signs are prices will remain well below historic highs through 2016. Overall, that is good news for airlines, but designing hedging portfolios during the next couple of years to exploit the declines and stave off further volatility will offer challenges and opportunities.