Wednesday, January 21, 2009

UAL Hedge Book Disaster

UAL corp. (UAUA) the holding company whose primary subsidiary is United Airlines, reported results for the Q4 and they lost a lot of money. Well it’s an airline and so who is really surprised. In reading the press release they had a lot of standard airline descriptions relating to passenger seat miles and costs based on capacity.

Then they tell you that they lost money primarily because the fuel hedges that they undertook went against them. They are not totally clear but the total cost of the hedges seems to have contributed approximately $1 billion dollars to the red. They then go on to say that it seems to be over and that these losses have been curtailed. Read this quote

Kathryn Mikells, senior vice president and CFO said. "The cash impact, while significant, is now behind us, and we are well positioned to manage through a challenging 2009 with good expected cost performance building on our momentum from this past year."

OK that’s the CFO he should know.

Then read note 10 to the financial statements. “....based on the hedge portfolio as of January 16, 2009...... at an illustrative $35 per barrel the Company's January 16, 2009, required collateral provision to its derivative counterparties would be approximately $780 million.”

The reality is that UAL as well as most other airlines has become almost a pure oil play with the complicating factor of a hedge book that does not seem to be working in their favour. The hedge book is not transparent to the equity investor with the exception that they seem to be taking big hits constantly.

All we have is management’s comment that the losses from hedging seem to be over. We have no idea what the future hedge strategy is to be if there will be one. The only certainty is that UAL does not know how to mange that risk and it will probably continue to bite them over and over again.