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Details on United's Fuel Hedges

In their quarterly earnings report, United gave us a good, deep look into their hedging activities for the fourth quarter of this year and full year 2009. How does it look? Not so good. It took a few emails to friends and some studying up for me to figure out exactly what this means, but I believe I understand it now. The bottom line is that for the 4th quarter of 2008, United will pay no less than $104 a barrel for about half its fuel needs. Yikes. A quick look at the Jet Fuel Price Monitor today shows that including the crack spread, jet fuel is going for about $91 a barrel right now.

This is, of course, the ugly side of hedging. When fuel was at $140, this looked pretty good. But now, it seems overly aggressive. For next year, the airline has about a quarter of its needs hedged at no less than an average of $101 a barrel, but they also won't pay higher than $114 a barrel (unless oil spikes above $135 or $145). It's too early to know if this will be a bad move, but considering the state of the economy, it would likely take an external shock to make these hedges worth something.

United's Hedge Positions as of October 17, 2008

Hedging Instrument % of Expected Consolidated Consumption % of Expected Mainline Consumption Average Price Where Payment Obligation Stops Average Price Where Payment Obligation Begins Average Price Where Protection Begins Average Price Where Protection Stops
4th Quarter 2008            
Collars 16% 19% N/A $99bbl $109bbl N/A
3-Way Collars 33% 39% N/A $107bbl $113bbl $133bbl
4th Qtr 2008 Total 49% 58% N/A $104bbl $112bbl N/A
Full Year 2009            
Calls 6% 7% N/A N/A $106bbl N/A
Collars 3% 4% N/A $109bbl $119bbl N/A
3-Way Collars 18% 22% N/A $102bbl $117bbl $145bbl
4-Way Collars 1% 2% $63bbl $78bbl $95bbl $135bbl
Full Yr 2009 Total 28% 34% N/A $101bbl $114bbl N/A
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