Delta Air Lines shifts fuel hedges out of US benchmark

Delta Air Lines, one of the world’s largest carriers, has shifted almost all its jet fuel hedges away from US crude in the latest sign that the benchmark has run into trouble as a tool to manage energy costs.

Delta and other US airlines have traditionally purchased contracts for US benchmark crude oil to hedge volatile jet fuel costs. Jet fuel is refined from crude oil and usually tracks its price.

But this year the US crude benchmark, known as West Texas Intermediate, has lagged behind the 27 per cent rise in jet fuel, creating difficulties for US airlines. The rise in Brent, a European benchmark, has been more in line with the jet fuel trend.

“We’ve needed to restructure our hedge position,” Ed Bastian, Delta president, told a conference last week. The airline spent $7.6bn on fuel and related taxes in 2010.

“WTI, which is the instrument that many of us hedge in this market, has dislocated from Brent in terms of pricing.”

The US benchmark has sold at a rare discount of $10 per barrel to Brent for most of this year as a glut developed at the Oklahoma delivery point for WTI crude futures traded on CME Group’s New York Mercantile Exchange.

With supplies pouring in from the US and Canada, analysts said the disparity of WTI with Brent and other grades might persist until pipelines reconnect the landlocked delivery point with waterborne markets along the Gulf of Mexico. This could take years.

US airlines seeking long-term protection against oil price swings have tended to favour crude oil to refined products because the market is more transparent and heavily traded. Delta uses a combination of crude oil, heating oil and jet fuel swap and option contracts to manage fuel costs.

Mr Bastian said Delta had “converted, over the course of the last 45 days, nearly all of our WTI positions” to Brent or heating oil.

JetBlue Airways, Southwest Airlines and Virgin America have also raised concerns about the discrepancy between WTI and jet fuel.

Energy exchanges are trying to take advantage of the shift. IntercontinentalExchange, the main Brent futures venue, on March 14 launched futures contracts that track the spread between heating oil, a jet fuel proxy, and Brent. ICE cited “requests from US-based market participants”. On Monday CME listed a similar contract.