UAL collateral on fuel hedges rises to almost $1B

MINNEAPOLIS – Falling oil prices have forced United Airlines to put up hundreds of million of dollars in new collateral on fuel hedges that have turned against it, and on Tuesday it said it had reworked a credit card agreement to reduce penalties if its cash balance falls.

Based on Tuesday's oil price below $51 per barrel, United would have to put up some $990 million in collateral, according to a formula for its fuel hedges that it disclosed on Tuesday. By comparison, as of Sept. 30, it had $378 million in cash deposits held by people on the other side of its bet that fuel prices would keep rising.

Shares of United parent UAL Corp. jumped $2.19, or almost 25 percent, to close at $11.04. Other airline shares rose, although not as much, as the price of a barrel of crude oil fell $3.73 on the New York Mercantile Exchange to settle at $50.74 a barrel.

Falling oil prices have stung United and other airlines because they bet that oil prices would rise. Airlines still save money because their fuel bill shrinks, but the hedging losses have forced them to take non-cash charges that could turn into cash losses if oil prices stay at current levels or fall further.

Based on Thursday's oil prices United said it expects to end the fourth quarter with $232 million in cash hedging losses, and another $138 million in noncash losses.

Chicago-based United said that without hedging it would have paid $2.57 per gallon of jet fuel during the current quarter. Counting hedges that have settled, that price rises to $2.81 per gallon. If current paper hedge losses become a reality, that price would rise to $3.70 per gallon, United said. United said it expects to use 500 million gallons of fuel for its mainline flying during this quarter.

"Lower fuel prices benefit our company and all of us," United Chief Financial Officer Kathryn Mikells told employees in an e-mail. "In this volatile environment, we are taking the right steps to ensure that we have the flexibility to achieve our business plan, respond to the current market, and ultimately return United to profitability."

United also said it bought put option contracts aimed at capping hedging losses if oil prices keep falling.

United ended the quarter on Sept. 30 with $2.93 billion in unrestricted cash. If that fell below $2.5 billion, its credit card processing agreement with Chase Bank required it to put up additional cash reserves above the current $25 million.

On Tuesday United said it had made a deal with the processor to push that cash requirement back to Jan. 20, 2010. In exchange for that leeway, United put up as collateral planes appraised at $800 million. Mikells wrote that United still owns free-and-clear more than $2 billion hard assets.

United can end the arrangement early if it wants to, and revert to its prior deal with the credit card processor. Under that arrangement, United's 25 percent cash reserve requirement jumps to 15 percent of its advance ticket sales if it has less than $2.5 billion in cash, with higher reserves if its cash drops further.

United also said it expects passenger revenue per available seat mile — meaning the money it collects flying one passenger one mile — to increase 2.5 percent to 4.5 percent during the fourth quarter, compared with the same period last year. Including the impact of accounting changes for frequent flier miles, it expects that revenue to range between decreasing 0.4 percent and increasing 1.6 percent.

JPMorgan analyst Jamie Baker wrote in a note that United's guidance is "suggestive of continuing weakness in air travel demand."

The $990 million collateral requirement at $55 per barrel oil was actually less than Baker was expecting. He had accounted for the possibility that United might need collateral of more than $1 billion at $70 per barrel oil.

"We were never particularly concerned with either its collateral requirements or its potential holdback, given our estimate for $70 oil and the worse demand environment ever witnessed" not counting Sept. 11, he wrote.