Airlines that act like hedge funds may get burned. That is not a terribly good message to take to shareholders, but United (NASDAQ: UAUA) will have to explain how it lost more than $500 million by betting wrong on the price of oil. It may get some of that back if oil's move reverses itself, but it may not.
According to The Wall Street Journal, "United Airlines said its fuel hedges are underwater by $544 million." Simply stated, the airline believed that prices would go up, and they went down.
The news raises the question of whether airlines should be allowed to hedge at all. It may improve their costs of fuel, but it also could cause losses on top of the ones they are suffering because of jet fuel prices and falling traffic.
United would say that being in the business of gambling on oil prices is good business. Hedges can offset fuel costs. But, the airline has proved that the system is hardly fool-proof.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
9-18-2008 @ 1:52PM
Charles Lapple said...
Has UAL management ever done any thing right?
10-07-2008 @ 6:32PM
G said...
UAL has an "oil man" as CEO, ie: former Texaco guy? I guess he didn't learn anything while in the oil business. Everyone in the world expected oil to come down because the populace was not going to put up with high oil prices, period!