FEATURE: Lacking visibility, US airlines avoid hedging near-record low jet fuel prices

Highlights

US airlines remain largely absent from jet swaps markets

Focused on struggling ticket demand, not record low fuel prices

Swaps interest up from those who haven’t hedged before

Houston —
The lowest jet fuel prices this century have not caused US airlines to hedge again, but some say they may buy when passengers return even if they don’t want to buy the dip in prices now.

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“We haven’t seen much action yet as most are far more concerned about the core aspects of their business, i.e. capital, customers, etc.,” said Mike Corley, president of Mercatus Energy Advisors, an independent energy hedging advisory firm.

“That being said, we are working with a couple US and Canadian airlines to ‘redevelop’ their hedging strategies to account for their new realities. I would expect that in the coming weeks as their new capital structures are finalized and they begin to get a better handle on capacity demand that we will see some of them begin to execute hedges,” Corley said.

It might still be a tough sell for at least three of the four US majors. What is essentially insurance on any airline’s single-largest cost has become less necessary for American, Delta, United and Southwest, the four largest passenger airlines in the world by fleet size.

Like most global airlines, they used to hedge jet fuel purchases. But massive financial losses from hedges were one reason US airlines merged into the four majors in the last two decades. A stronger financial position also meant they didn’t need to hedge, or weren’t required to anymore by lenders.

American Airlines was the first of the majors to end hedging, doing so in 2014 but maintaining it could always re-enter that market. At a June 10 investor meeting, chairman Doug Parker said they looked at hedging even back April lows “as we should and came to the conclusion it didn’t make sense. The forward curve was significantly upward sloping. The amount of capital we’d need to put up front didn’t justify locking in … some of those prices.”

S&P Global Platts’ benchmark assessment for Gulf Coast pipeline jet fuel reached 37.08 cents/gal April 28, or $15.57/b, the lowest since March 17, 1999, not accounting for inflation.

Parker cited its fuel-efficient, modern fleet and noted how demand and ticket prices track jet fuel prices as reasons not to consider hedging. “We think we’re nicely hedged, naturally, against fuel prices,” he said.

HEDGING MINDSET

A US jet fuel trader noted Southwest was the only US airline to pull off hedging consistently, but even it has pulled back due to recent losses from locking in high prices. US airlines are missing out on hedging because of that mindset, he said.

“They don’t realize an amazing opportunity when it presents itself. They only care what the other airlines are doing, and if nobody else is hedging then they have nothing to lose versus their competition. That’s not the business they are in,” he said. “If oil goes to $80/b, the plan is to just increase ticket prices. That’s their most comfortable lever to pull. This fuel hedging is too tricky, and too many got people burned on the last downturn.”

A European jet fuel trader said US airlines were better positioned than European and Asian airlines, who have been stung from the jet fuel price crash. He still didn’t expect European airlines to exit from what they saw as necessary hedging strategies, but he did think US carriers might start hedging.

A US jet swaps broker said “everyone is feeling” the lack of hedging but he also thinks airlines will return eventually. “But likely not for the next six to 12 months until the global economy turns around and COVID is mostly sorted,” he said. “It wasn’t a price anomaly; it was from lack of demand, so I guess it comes hand in hand.”

SHORTER HEDGES, NEW PLAYERS

When US airlines return, Corley said, he expects to see average hedge tenures shorter than typical and strategies focused on cash flow and balance sheet rather than oil prices. “Cash is, and will be, king for many of them for the foreseeable future,” he said.

On a balancing note, Corley said his company is seeing much more interest than normal from other players, such as corporate, private or heavy industries that have never hedged before, trying to lock in prices along the curve.

The latest forecast from S&P Global Platts Analytics estimates spot market USGC jet prices at $40.15/b in July, rising to $43.80/b by December and not moving over $50/b until April 2021. Platts Analytics also forecast US jet fuel demand to drop from 1.75 million b/d in 2019 to 1.22 million b/d in 2020, and not return to over 1.7 million b/d until 2025.

The jet swaps broker called the jet derivatives market reactionary to recent headlines like US states pausing their reopenings: “If the summer is this bad, I can only imagine the winter being worse.”

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