'Duh!' of the day: United loses $544 million betting on the fuel market
Sep 22nd 2008 4:13PM
Updated Sep 26th 2008 11:03PM
Hedging fuel costs sounds confusing, but it's nothing new. Some airlines, like the budget model Southwest, have managed to claim a profit in no small part because their masters were clever enough to buy most of its fuel when it was still sensibly priced. That can work out really well if gas prices go up, because those smart airlines will still be paying an older, lower price. Some experts think Southwest has saved $3.5 billion by doing this since the late '90s.
United Airlines, which has a management as sharp as a box of hammers and aging seating about as soft, thought it could imitate Southwest by getting into the hedging game, too. But, whoops! Timing is everything. It got in way too late, as the market prepared to peak. Prices went down. And right now it's paying almost $13 more a barrel than oil is actually worth, which could rack up as much as $544 million in boneheaded, unnecessary losses.
It's a lot like the guy down the street who bought his house a year ago for $400,000, only to find in this self-correcting market that it's now worth about $250,000, which everyone in the neighborhood knew was a more realistic price all along. He intended to flip it, but now he's got to live in it. Of course, if gas prices go back up a bit, United's loss may be mitigated slightly.
Dimwitted financial brinkmanship like this ends up costing consumers. Just last week, United doubled its fee for a second checked bag to $50 per flight. At the time, the excuse it gave (fuel prices) seemed feeble because everyone knows prices have descended in the past few weeks. But learning how the airline burned itself by playing a big boy's game makes its voracious need for fees a little more logical.
Also last week, United announced that it stands to reap $700 million from its despised new fees, which can double the sticker price of the average ticket. Now the income brought in by those fees isn't going to amount to much after the cost of hedging is deducted. So we should brace ourselves for even more fees.
United isn't the only carrier to get in too late on the fuel hedging game. Northwest locked in at a point that will have it losing cash if fuel goes below $112 in 2009. It already has. Right now, it's around $97.
Which all means some of the airlines, after slamming us with surcharges and baggage fees because fuel prices went up, are now in the ludicrous position of hoping gas gets more expensive again. It's to their benefit that oil prices actually rise. Personally, I'm always scared when powerful corporations stand to make money from circumstances that will penalize the rest of us. Sound familiar, Wall Street?
Update: Good news! Oil prices jumped $16.37 today. (Well, that's good news for United and Northwest, anyway.) Stay tuned to see if the price spike holds over time.