Fuel Hedging for Delta Airline

Topics: Airline, Futures contract, Option Pages: 4 (613 words) Published: March 2, 2013
Fuel Hedging for Delta Airlines

Delta Air Lines
• A major United States Airline • Results of operations are impacted by changes in • Aircraft fuel prices • Interest rates • Foreign currency exchange rates

• Derivative contracts
Derivative Type Hedged Risk Classification of Gains and Losses

Fuel hedge contracts
Interest rate contracts Foreign currency exchange contracts

Increases in jet fuel prices
Increases in interest rates Fluctuations in foreign currency exchange rates

Aircraft fuel and related taxes
Interest expense, net Passenger revenue 2/12

Fuel Cost
• No. 1 cost for Delta Air Lines – 36% of total Operating expenses • Average price per gallon fluctuates ($2.12~3.16) with the price of crude oil $3.50 40% 35% 30% 25% $2.00 20% $1.50 15% Avg. Price/Gallon % of Total Oper. Exp. $3.00


• How to manage the fuel cost becomes the key success factor for airline industry


10% 5% 0% 2006 2007 2008 2009 2010 2011




Approaches to Fuel Price Volatility
• Increase fuel efficiency
• Short-term: changing operating procedures or tankering policies

• Pass on increases to their customers and cargos • Hedge future fuel requirements using physical and derivative markets


Crude Oil Prices


Fuel Hedging
• Fundamental Rational
• Fuel price fluctuation is not consistent with economic activity • Gap between sell tickets, collect money, and buy fuel

• Purpose
• • • • Lock in the future fuel cost Stabilize fuel cost, overall costs, cash flows, and profits Lower fuel risk exposure and cost of equity Alter the timing of profits: • Mark-to-market adjustments for fuel hedges recorded in periods other than the settlement period

• As a signal of management competence

Fuel Hedging Instruments
• Jet fuel, gas oil and crude derivatives:
• • • • Forward contracts Future contracts Options and collars Swaps

• Other hedging methods:
• Merges and acquisitions...
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