Delta Airlines’ new CEO Ed Bastian admits glibly “We’ve lost over the last eight years about $4 billion cumulatively on oil hedges” in a recent
Bloomberg interview. When asked if he would consider hedging, or locking in oil prices in the future,
he states “I don’t get paid to make those kinds of bets.” Given that fuel accounts for between 23% and 33% of Delta’s costs from year to year, that is an incredulous statement.
Delta Air Lines Boeing 767-300 landing at Stuttgart Airport, Germany. By Juergen Lehle
To be profitable Delta must price its airline tickets above its costs. Revenue from tickets can generally be forecast with reasonable accuracy, and labor costs are easy to forecast. How much jet fuel its airplanes will consume is also easy to forecast.
The challenge is in predicting the cost of jet fuel, or, alternatively, hedging against price increases. It is not a “bet.” Hedging is easily accomplished by buying futures contracts or call options at fixed prices on an options exchange. It can also be accomplished by acquiring the commodity producer such as U.S. Steel did with
Marathon Oil
MRO -1.16% Corporation and Texas Oil & Gas Corporation, or as R. J. Reynolds did with Aminoil. The buyer then profits from rising oil prices to offset its increased fuel costs.