Efforts to protect against the rising cost of fuel were limited, and most carriers paid the price, reporting dramatic widening in losses. Delta Air Lines Inc. Wednesday said it took a $6.1 billion write-down in its most recent quarter, which was related to a decline in market capitalization stemming from rising fuel costs. Tuesday, UAL Corp., the parent of United Airlines, saw its first-quarter net loss triple to $537 million, and other major carriers were in the red as well.

“Hedging costs money,” says Stephen Schork, who writes the Schork Report, a newsletter on oil and gasoline. “The perfect hedge loses money. Given how tight the margins are, some have opted to fly by the seat of their pants.”

Paying the Gas Bill

Cost of Jet Fuel/Gallon, Q1 08
Airline Cost (gal)
Southwest $1.98
JetBlue $2.65
AMR Corp. $2.74
Continental $2.80
Delta $2.85
UAL Corp. $3.02

Source: Company reports

Delta hedged about 27% of its first-quarter fuel consumption, while UAL hedged 30%, and Continental Airlines Inc. hedged just 22%, thus leaving the carriers exposed to the steadily rising price of jet fuel. According to the U.S. Energy Information Administration, the spot price of kerosene-type jet fuel delivered to New York harbor closed at $3.542 a gallon on Tuesday, a 75% increase from $2.027 a year earlier.

The one notable exception is Southwest Airlines, which has been known for aggressive hedging of fuel costs. The company has hedged 70% of its anticipated second-quarter fuel consumption, anticipating second-quarter jet fuel costs of $2.35 a gallon, substantially lower than any of the other major U.S. carriers. The company squeaked out a $34 million profit, or five cents a share, in the first quarter.

Their cost of fuel for the first quarter on a GAAP basis came to $1.98 a gallon, rising 21% from the year-earlier period. By comparison, Continental paid $2.80 a gallon, up 48% from the year-earlier period, when it paid $1.90 a gallon. Airlines that were forced to file for bankruptcy protection in recent years were restricted from hedging — and as a result are playing catch-up.

But with crude oil currently sitting near $120 a barrel, it creates a dilemma for the air carriers: hedge against those higher prices, thus risking exposure if the price of oil does finally decline, or swallow hard and deal with the stratospheric cost of fuel.

“They’re now recognizing the risk inherent in that bubble market, and they’re one of the largest folks exposed to that bubble,” says Jon Najarian, co-founder of Optionsmonster.com, a derivatives strategy firm. “If oil goes down too fast you get caught locking in prices ludicrously high, and then you carry that on to the consumer for a considerable period of time.”