US Airways policy of not hedging jet fuel will now extend to American Airlines, says chief executive The world's largest airline in terms of passenger traffic will stop hedging its jet fuel costs, its new chief executive has announced. American Airlines Group (AAG) – the Texas-based airline giant that resulted from the merger of US Airways and AMR Corporation, the parent company of American Airlines – will allow its current hedges to roll off and does not envision entering into any new ones going forward, chief executive Doug Parker said during a January 28 conference call on the company's latest quarterly financial results. "We haven't entered any hedges since the merger, and the hedges that were in place under American are still in place. At this time we don't intend to enter into any additional transactions," said Parker, who was previously the chief executive of Arizona-based US Airways. Parker said it was possible, but unlikely, that AAG would start hedging again in the future. "We could at some point, I suppose, but [we have] no intent to do so," he said. The comments were the first public statement from the company’s new management team on how it would approach the question of fuel hedging since the merger was completed on December 7, 2013. Prior to the merger, US Airways was the largest US carrier that did not hedge its jet fuel costs, and its executives were known for questioning the value of hedging in media interviews and other public statements. In contrast, AMR Corporation regularly used derivatives to hedge the fuel costs of American Airlines, a common practice for most US and international carriers. That set up a culture clash when US Airways launched a bid to merge with AMR Corporation in the wake of AMR's November 2011 bankruptcy filing, says Robert Mann, a New York-based independent airline consultant. "The two companies came from two different places, both practically and philosophically," Mann says. "At US Airways, you had a company that was trying to do the best job it could do to provide a natural hedge by flying the newest and most fuel-efficient equipment they could, [which] analytically had determined that the cost of hedging was the biggest deterrent to actively engaging in hedging. At American, you had a company that had a very fuel-inefficient fleet that could not withstand the volatility that would go with rapid rises in supply costs, including energy. So as a result, it had, at various points in time, a very significant hedge position." Market sources contacted by Energy Risk questioned the wisdom of AAG’s new policy. "I think it's crazy," says one Houston-based energy trader. "Their entire peer group is hedging to some degree... Even if they're more fuel-efficient than the entire rest of the industry, that doesn't replace managing their price risk." Initially, though, the biggest losers from AAG’s policy shift are likely to be the banks that had previously acted as hedging counterparties to AMR Corporation. Airline fuel hedging has traditionally been a core business for banks' commodity desks. "For whoever has the American Airlines account, they're going to have to go look for another source of revenue, because this is a big money-maker," says Walter Zimmermann, vice-president and senior technical analyst at United Icap, a New Jersey-based energy brokerage. "These investment banks don't extend these hedges out of the goodness of their hearts. They do it as a profit centre. So they'll just have to find another profit centre."...
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