United Airlines Is Apparently Crappy At Buying Fuel

United Airlines is just super crappy at fuel hedging, says Wired. Now that oil is trading at less then $100 a barrel, it turns out that United is paying more than that — and more than other airlines:

The company has 51-percent of its 2008 fuel hedged at $111. Per-barrel prices closed at under $98 yesterday. Looking forward to 2009, the airline’s fuel hedges are based on per-barrel prices of $118.

Hedging is a big roll of the dice, and no one has played it better than Southwest Airlines. It has consistently hedged more fuel than its competitors. As of this summer, Southwest has 70-percent of its 2008 fuel hedged at $51 a barrel. Compare that with American Airlines, which has 34-percent hedged hedged at $82 a barrel.

Industry analysts estimate that since 1998 Southwest has paid $3.5 billion less for fuel than its competitors. That’s equal to 83-percent of its profits over the last nine years. It’s a big part of the reason the airline continues reporting profits while the rest of the industry bleeds.

They’re going to need to sell a lot of snack boxes to make up for that…

Airlines Hurt By Dropping Oil Prices. Huh?!! [Wired]
(Photo: FlyGuy92586 )

Comments

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  1. Chairman-Meow says:

    It is just me or is someone at UAL seriously wanting that airline to go out of business ?

  2. starrion says:

    No. Just run of the mill incompetence.

    UAL has had miserable leadership for a very long time. Failed mergers, bankruptcies, and miserable employee relations.

    Bad employee relations generates less-than-stellar service. Some employees still try pretty hard to keep people happy.

  3. Parapraxis says:

    Fuckin’ A, southwest, that’s incredible… 51 a barrel… can we as consumers do that by forming a co-op?

    A man can dream…*sigh*

  4. Zanorfes says:

    I don’t think morale at UA is very good and this doesn’t help. Either way, you have to hand it to Southwest, they are doing something right. True, they treat people like cattle, but that’s the least of our travel ordeals. They get you there. You hear horror stories now and then, but hardly like the stories you hear about AA, UA, USAir…etc etc etc.

  5. Now if only the government would just let an airline go under for sucking so much at business/customer-satisfaction/life then we would see smarter more customer friendly airlines take over.

  6. mugsywwiii says:

    Raise your hand if you predicted 6 months ago that oil would be under $100/barrel now.

  7. metsarethe... says:

    hedging is quite difficult in such volatile markets, and I’m sure oil at 111 looked good when it was at 150… Outside of that UA has some terrible service in my opinion

  8. I think it’s clear that fate wants this airline to go out of business.

    After my experiences with United, I think I agree with fate.

  9. The_Gas_Man says:

    I <3 Southwest. Just to let everyone know.

  10. blackmage439 says:

    So, what you’re saying is United is tanking from crappy business management, and not increasing fuel prices?

    I’m shocked. SHOCKED.

  11. Triterion says:

    This kind of mismanagement is what caused UA to go bankrupt the first time. Maybe they just want another bailout from the government just like their first bankruptcy in 2002. It’s like they know they can f-up all the time and not have to deal with it.

  12. BeowulfRex says:

    Just to be clear, the article quoted is talking about barrel prices for Jet A1 fuel, not sweet crude oil. Two completely different products, and sold at different prices.

  13. Altdotweb says:

    Prices will rise once the election is over.

    High Gas prices = mad voters

  14. Skipweasel says:

    Again the business world is wrong-footed by complex financial instruments. OK, so hedging isn’t /that/ complicated, but it does seem that the further things get from simple the more likely it is to go wrong and worse it is when it does.

    We had a plain variable-rate mortgage and paid it off. We have friends who have endowment mortgages which turn out not to be fully covered by the redemption value of the fund at term. Friends who have fixed-rate mortgages and are locked in at a disdvantageous rate. Friends who have fancy pensions which turn out not to be worth as much as they expected and so on.

    Presumably this generation will now be wary of coplexity and opacity, but there’ll be another lot of gullible punters along soon enough.

  15. hhole says:

    Just buy an efuel system, convert your car to run on ethanol (not too expensive or that difficult) and benefit from a sugar lobby that is not going away anytime soon.

    http://www.efuel100.com

    I bet United wishes they could run their planes on homemade moonshine too!

    • SScorpio says:

      @hhole:

      Making E85 at home might work, but it’s not worth buying at the gas stations around here. When gas was around $3.85/gal, E85 was $3.25.

      But the mileage was under 20MPG with E85 while gas gets around 26MPG city. E85 was thus $0.1625/Mile and normal gas is $0.1480/Mile. Add the cost of the conversion for your car and you’re even further under.

  16. t325 says:

    Woah, I’m surprised this thread has gone this long without a “Fuck flying, drive everywhere, and I hope all of the airlines shrivel up and die” comment.

    I just booked my flight to Berlin and these guys (And Lufthansa for that matter, since the return trip is on a codeshare with them) better stay in business until at least the 2nd week of March 2009 or I’m gonna be pissed. And before anyone says “Fuck flying, drive everywhere, and I hope all of the airlines shrivel up and die” I’d like to see you drive from St. Louis to Berlin.

  17. QrazyQat says:

    According to Google maps it’s only 328 miles to Berlin, and you’d have to fly into KC and drive from there anyway. Why are you flying?

    • t325 says:

      @QrazyQat: I’m not sure what Berlin you’re talking about, but I’m talking about Berlin, Germany. It’s about 5,000 miles from here with a giant ocean in the middle.

  18. Jesse says:

    Buying fuel in the futures market is a hit or miss proposition. When you bet right and you come on the low side, you are a hero like Southwest. If your futures contracts are higher than the spot price, then you look like a moron.

    However, in the end it’s part of the risk of buying on the futures market.

  19. leftystrat says:

    Sounds like time for another round of bonuses for Upper Manglement!

  20. humphrmi says:

    Huh? Fuel hedges are contracts to buy at a certain price, without the requirement to do so. Unexecuted, the future contracts expire worthless. If you buy an oil future at $111 and the underlying oil delivery ends up costing $98, you only lose the cost of the contract, not the strike price.

    I don’t get this, Wired is usually cluefull. You can buy fuel at market prices any time you want.

    • Eric1285 says:

      @humphrmi: I was thinking the exact same thing. Wouldn’t they only be holding options to buy fuel at $111 or whatever? Nothing is forcing them to do so, unless they paid more for the options than the current difference between the market price and their option price.

    • shoegazer says:

      @humphrmi: but seeing as how Southwest and American managed to hedge at such a low price, United is still paying more than $40 above the competition. You are correct that the article is misleading though.

      • shoegazer says:

        @shoegazer: OR the hedging could refer to a futures hedge in which you’re committed to buying at the contract price and taking the loss vs market price. I don’t know why they would choose to do this instead of executing an options hedge.

  21. $100 per checked bag coming soon!

  22. DrJimmy says:

    @LiquidGravity:

    TWA
    Eastern Airlines
    Pan Am

    come to mind as airlines that couldn’t manage their ways into the modern world. Several decent-sized regional carriers have cratered this year, too.

  23. TrustUs says:

    UAL wants bankruptcy so badly, it’s doing everything it can to get there. There has to be a reason: they can sell slots, they can get out of deals with employees, plane leases, oil hedges. The buyer could buy the routes and all without employee overhead and poor energy management. Who knows what the benefits are, but UAL wants to happen into bankrupcy faster than they fly.

  24. velho says:

    @shoegazer A futures contract can be a lot cheaper than an option.

    I don’t know what the oil they hedged was at, and I DON’T want to defend UAL, but hedging is like insurance. Picking on this is like saying that you “incompetently threw money away” last year because you had auto insurance but didn’t have an accident.

    That said, the fact the other airlines hedged at much lower costs would say they did screw up. Maybe they didn’t hedge for the longest timing and then panicked at the higher prices. Had prices dropped below SW and the others hedge positions, they would have come out ahead. It’s not easy.

    Evaluating hedges in hindsight is like reviewing Vegas line after the game and lambasting them for the ones that were way off.