Here's a news flash -- fuel prices for the third quarter were down across the board for the airline industry. Not only is this odd given that fuel prices traditionally rise throughout the third quarter, but it would normally spell good news for passengers because it offers even less incentive for airlines to raise their prices. But don't tell that to Delta Air Lines
Well, folks, there's a reason your broker puts that little note in fine print at the bottom of those legal disclaimer that reads "past performance in no guarantee of future results" -- and this quarter, many airlines learned this the hard way. With prices traditionally rising at this time of year, airlines hedged their fuel costs heavily only to find out too late that fuel prices were falling, forcing many to take hefty writedowns during the quarter.
Wall Street darling Southwest Airlines
Unlike most airlines that have a fuel-hedging portfolio that consists of a mixture of heating oil, jet fuel, and West Texas Intermediate (WTI) crude oil, Southwest is heavily levered toward WTI. When WTI crude took a dive during the quarter, it spelled another monstrous paper loss for the airline.
Other airlines that are set to report later this week will probably fare better than Southwest because their fuel hedges are generally more balanced, including United Continental
What this quarter and many over the past few years has taught me is that the airlines are terrible predictors of the future price of oil, or any fuel for that matter. Recently, more often than not, solid quarterly results have been smirched by paper losses stemming from fuel-costs hedging activity. My advice to the airline industry would be to get a Magic-8 Ball and hope for the best. As for investors, if you're heading to Vegas for a week of fun in the sun and gambling, you should be OK as long as none of your friends works for the airline industry as a professional fuel-cost broker.
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Do you place any credence in the losses or gains achieved by fuel-cost hedging in the airline sector, or is it just the same smoke and mirrors we see in the banking sector? Sound off in the comments section below and share your reasoning.