=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/c/a/2008/09/18/BUOC12VT8S= .DTL --------------------------------------------------------------------- Thursday, September 18, 2008 (SF Chronicle) United's bets on fuel prices could be costly Joshua Freed, Associated Press (09-18) 04:00 PDT Minneapolis -- Airline bets that oil prices would rise looked like a no-brainer this summer. But with oil prices falling, those hedges against rising fuel costs are getting expensive. United Airlines said Wednesday that it is on track to lose $544 million = on fuel hedges this quarter. That includes $72 million in realized losses and another $472 million in unrealized losses. Those positions forced United to put $400 million into restricted cash for the parties on the other side of its oil price bets. Other airlines have not disclosed their hedging losses or gains for the third quarter, but it is likely that United is not alone in underestimating oil's dramatic fall. Oil settled at $97.16 a barrel on the Nymex Wednesday, down from a July peak of $147. Northwest Airlines Corp. said in July that its hedges require it to pay = if crude falls below $108. Its hedge for 10 percent of its fuel for next year requires it to pay if crude falls below $112. Of course, rallying oil prices could make those hedges look smart again. And - importantly - even if United loses money on fuel hedges, it will save money because the fuel itself is cheaper. JPMorgan analyst Jamie Baker wrote in a note that oil's fall in just one week will save airlines $3 billion. Fuel has become the biggest expense at the big airlines. United's 2007 fuel bill was $5 billion, which was reduced slightly by an $83 million hedging gain. "Yes, hedgers are under water on their hedges, but they are seeing some relief on the cash market side. That's how it should work," said Jonathan Leak, a senior vice president for risk management at World Fuel Services, which puts together fuel-hedging programs for airlines. However, fuel prices have not fallen as much as crude in the short run because refiners are at capacity. Hurricane Ike made that worse because 12 of the 14 jet fuel refineries in its path are still shut down because the power is out, Leak said. Those 14 refineries make 19 percent of the nation's jet fuel. Also, airline fuel hedges are more often really bets on the movement of crude oil or heating oil, not the kerosene the jets really burn. Most of the time that works fine because they all move up or down together. But when the refineries are down because of a hurricane, crude can fall faster than jet fuel - meaning airlines risk losing money on hedges, with smaller savings than they would have hoped on their fuel bill. Airlines have reported hedging losses before, including Delta Air Lines Inc. with a $108 million loss in 2006, Continental Airlines Inc. with a hedging loss of $18 million in early 2007. Southwest Airlines Co., the king of fuel hedging, has saved $3.5 billion on its fuel bill since 1999. ----------------------------------------------= ------------------------ Copyright 2008 SF Chronicle <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> If you wish to unsubscribe from the AIRLINE List, please send an E-mail to: "listserv@xxxxxxxxxxxxxxxxx". Within the body of the text, only write the following:"SIGNOFF AIRLINE".