UAL: Hedge Funds Hurt Us on Fuel

Date: Thursday, January 22, 2009
Author: The Street.com

Caught in a vicious cycle as hedge funds and other financial players ratcheted the price of oil steadily higher, United parent UAL(UAUA Quote - Cramer on UAUA - Stock Picks) on Wednesday reported a $547 million fourth-quarter loss, primarily due to fuel hedging losses.

On an earnings conference call, CEO Glenn Tilton pointedly noted that Goldman Sachs had predicted fuel prices of $200 a barrel by year-end.

"Today, crude oil is not $147 a barrel. nor is it $200 a barrel, but rather $40 a barrel, but yet we are in a financial crisis," he said.

"The implosion in price established a huge commodity bubble, just as we had a huge credit bubble," Tilton said. ""If there is one thing I have learned about commodities, it is that high prices beget low prices. What was unusual was the amount of financial institutions and hedge fund participating in the bubble.

"You've seen those positions unwind," he said, noting that the groups' participation "created the rapidity of the decline," imposing a burden on companies that must purchase large quantities of fuel to do business.

Going forward, Tilton said, "we are hearing from the (Obama) administration and from and various exchanges that there is going to be more disclosure require, more transparency required, and I think that's going to be a good thing."

United beat estimates, losing $4.22 a share excluding hedging losses and certain accounting charges. Analysts surveyed by Thomson Financial had predicted a loss of $4.42 a share. The loss included $370 million in cash losses on hedges that settled in the quarter. Revenue was $4.55 billion, down 9.6%, in line with estimates.

Including unrealized hedging losses and other charges, United posted a pre-tax loss of $1.3 billion, or $9.91 a share. Included were non-cash, mark-to-market losses of $566 million, reflecting the expected future value of the losses.

CFO Kathryn Mikells said the carrier had little choice in its hedging strategy, given that its intent was to mitigate risk and volatility. "I think there is always a cost to taking an insurance policy out," she said. "I don't think people should have the expectation to expect them to pay."

Looking ahead, fuel hedging costs will have a limited impact, Mikells said. United estimated that first-quarter results will include $81 million in cash fuel-hedging losses and $69 million in non-cash, net mark-to-market fuel hedging gains.

In addition to hedging losses, United saw fourth-quarter premium cabin demand decline by 25%, primarily in international markets. "We started to see a softening in premium travel trends in the spring of 2008," said John Tague, executive vice president. "That grew as went through the year."

Over time, the impact will be mitigated, Tague said, partially because international businesses passengers are moving to coach, and partially because United is working to decrease premium capacity in its aircraft by about 20%, a process that will be completed in 2010.

Looking ahead, Tague said, "absolute demand is clearly going to be under significant pressure," but United will benefit from capacity reductions throughout the industry.

During the quarter, passenger revenue per available seat mile rose 4.7%, excluding mileage plus accounting impacts. Domestic mainline passenger revenue per available seat mile, excluding mileage plus accounting, rose by 6.7%. On the cost side, cost per available seat mile excluding fuel and other one-time accounting charges increased by 1.6%, despite an 11.7% decrease in mainline capacity.

United said it intends to reduce employment by 9,000 positions by year-end. It will eliminate 1,000 salaried and management jobs, in addition to 1,500 already announced. Among front-line employees, it will eliminate an additional 1,000 jobs, beyond 5,500 already announced.