Falling fuel prices sting UAL, force carrier to put up more collateral
MINNEAPOLIS -- Falling oil prices have forced United Airlines to put up hundreds of millions of dollars in new collateral on fuel hedges that have turned against it, and on Tuesday it said it had re-worked a credit card agreement to reduce penalties if its cash balance falls.
Based on Tuesday's oil price of around $51 per barrel, United would have to put up some $990 million in collateral, according to a formula for its fuel hedges that it disclosed on Tuesday. By comparison, as of Sept. 30, it had $378 million in cash deposits held by people on the other side of its bet that fuel prices would keep rising.
Shares of United parent UAL Corp. jumped $1.67, or 18.9 percent, to $10.52 in afternoon trading. Other airline shares rose, although not as much, as the price of a barrel of crude oil fell $3.37 on the New York Mercantile Exchange to $51.13.
Falling oil prices have stung United and other airlines because they bet that oil prices would rise. Airlines still save money because their fuel bill shrinks, but the hedging losses have forced them to take non-cash charges that could turn into cash losses if oil prices stay at current levels or fall further.
Based on Thursday's oil prices United said it expects to end the fourth quarter with $232 million in cash hedging losses, and another $138 million in noncash losses.
Chicago-based United said that without hedging it would have paid $2.57 per gallon of jet fuel during the current quarter. Counting hedges that have settled, that price rises to $2.81 per gallon. If current paper hedge losses become a reality, that price would rise to $3.70 per gallon, United said. United said it expects to use 500 million gallons of fuel for its mainline flying during this quarter.
United also said it bought put option contracts aimed at capping hedging losses if oil prices keep falling.
United ended the quarter on Sept. 30 with $2.93 billion in unrestricted cash. If that fell below $2.5 billion, one of its credit card processing agreements required it to put up additional cash reserves above the current $25 million.
On Tuesday United said it had made a deal with the processor to push that cash requirement back to Jan. 20, 2010. In exchange for that leeway, United put up as collateral planes appraised at $800 million.
United can end the arrangement early if it wants to, and revert to its prior deal with the credit card processor. Under that arrangement, United's 25 percent cash reserve requirement jumps to 15 percent of its advance ticket sales if it has less than $2.5 billion in cash, with higher reserves if its cash drops further.
"In an environment where revenue and fuel remain uncertain, we believe the modified agreement provides the company with increased flexibility," United spokeswoman Jean Medina said.