Delta Airlines and its use of derivatives

http://www.ajc.com/news/content/busi.../19airoil.html

Delta had long-term hedge contracts to buy fuel at 76 cents a gallon but sold them in February for $83 million in cash. The move was a bet that oil prices were going to fall. But jet fuel prices skyrocketed to $1.58 a gallon, and Delta — which burns about 2 1/2 billion gallons of jet fuel a year — has lost millions of dollars in the untimely sale. Delta said in July that surging fuel prices would cost it $680 million more this year than last. But the airline issued that statement when oil was selling for about $40 a barrel. Since then, oil prices have surged more than 25 percent.

Well, that's a big for Delta.

[Asynchronous]

According to Marketplace (on NPR) yesterday, Delta sold them to raise cash. i.e. they hoped prices would fall, but realistically, they had debts to pay and the hedges were marketable.

[Maine-iac]

Wonder who the lucky buyer was?

Originally Posted by Asynchronous

According to Marketplace (on NPR) yesterday, Delta sold them to raise cash. i.e. they hoped prices would fall, but realistically, they had debts to pay and the hedges were marketable.

Was the risk really worth it? They went through $83M in 11 days.

If oil stays at $50 a barrel, Delta estimates its "liquidity needs" will increase by $600 million next year.

I'm not an airline expert, but from a cash flow perspective that seems like a bad move. (In hindsight of course, but then again execs get paid the big bucks for FOREsight.)

[DW Simpson]

If they sold them in February, their then-CFO bolted in April just in time.

http://www.cfo.com/article.cfm/30132...origin=archive

[A Student]

This is a perfect example of the difference between "speculation" and "hedging".

There has to be some negligence (fraud even?) in the financial statements if Delta advertised these derivatives as hedges against rising future fuel prices, and then sold them hoping for a gain. Saying they are hedges would imply risk mitigation which wasn't there in practice...

[The Mad Hatter]

Hedging requires discipline - something that many large stock companies lack.

It's a tired analogy but suppose that Delta had discontinued insurance payments under hope that none of its planes would crash this year...

Originally Posted by The Mad Hatter

Hedging requires discipline - something that many large stock companies lack.

It's a tired analogy but suppose that Delta had discontinued insurance payments under hope that none of its planes would crash this year...

Wouldn't that be in some ways less risky than what they actually did?

A plane crash wouldn't cost them $600M and how many planes of their planes crash a year. The fuel decision though was basically a 50-50 bet on having to shell out $100M's of extra dollars.

[Maine-iac]

Not the insurance on the plane, the liability insurance. One crash could exceed $600M in liability pretty easily if the plane was loaded and the airline at fault.

Originally Posted by Maine-iac

Not the insurance on the plane, the liability insurance. One crash could exceed $600M in liability pretty easily if the plane was loaded and the airline at fault.

OK.

So we're saying that selling this hedge was the SECOND most stupid thing Delta could have done, right after cancelling its insurance.

It still seems pretty bad to me. It was a bad gamble, plain and simple. As Student said, these contracts are for hedging not speculation.