source: 05MAY11 10Q: Investor Relations - SEC Filings

Fuel Derivatives. Our fuel derivative instruments generally consist of West Texas Intermediate crude oil ("WTI"), Brent crude oil ("Brent"), heating oil and jet fuel swap, call option, collar, and three-way collar contracts. Swap contracts are valued under the income approach using a discounted cash flow model based on data either readily observable or derived from public markets. Discount factors used in these valuations ranged from 0.996 to 0.999based on interest rates applicable to the maturity dates of the respective contracts. Call option, collar and three-way collar contracts are valued under the income approach using option pricing models based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets. Volatilities used in these valuations ranged from 15% to 36%depending on the maturity dates of the respective contracts.

Delta Air Lines shifts fuel hedges out of US benchmark

By Gregory Meyer in New York
Published: March 28 2011 20:35 | Last updated: March 28 2011 20:35

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.

May 19 (Bloomberg) -- Air France-KLM Group said it held a "vigorous" debate with SkyTeam ally Delta Air Lines Inc. over capacity before the pair agreed to slash seats in their trans- Atlantic venture as much as 9 percent for the northern winter.


The shift, also involving Italy's Alitalia SpA, will entail fewer frequencies and a redeployment of the fleet to cope with rising fuel costs and fluctuating demand, with some planes sent to warmer destinations where winter demand is stronger, the companies said today. The carriers jointly operate 260 daily flights with 144 planes, generating $11 billion in annual sales.


"We went too hard last year, especially on the U.S. side," Air France Chief Executive Officer Pierre-Henri Gourgeon said today in Paris. "Everyone was enthused after the summer and said 'wow, we have the aircraft, let's go.' But the gap between demand and capacity fell. This year we want to correct that."


Negotiations with Delta, which lifted capacity 20 percent last winter, were "vigorous" and a test of the governance of the joint venture, Gourgeon said, adding that "business discussions are always a bit tense."


Delta and its partners worked as a "virtual single airline" to determine which cuts to make and on which routes, and that's "a great testament to how we work together," said Olivia Cullis, a spokeswoman for the U.S. carrier in London.
Empty Seats


Atlanta-based Delta failed to lift ticket prices across the Atlantic in the first quarter after boosting capacity there 16 percent as traffic rose 6 percent, it said last month. The disparity cut seat occupancy by 6.4 percentage points and helped push the world's No. 2 airline to a $318 million net loss.


The cuts announced today will cover the fall and winter seasons and eliminate 7 to 9 percent of seats on relevant routes versus a year earlier, the companies said.


Delta CEO Richard Anderson acknowledged on April 26 that there was "significant industry overcapacity" on trans- Atlantic routes, and the carrier said May 6 it would pare seating in the market by 8 to 10 percent following the Labor Day holiday in September. Delta President Ed Bastia said today at a transportation conference that the figure is now 10-12 percent.


Peter Hyde, an analyst at Liberum Capital in London, said today in an investor note that Delta and Air France had revealed future seating plans "early" and that he's concerned about the European carrier's "strategic positioning" in light of last winter's capacity deployment and issues over yields or pricing.


Fuel Squeeze
Airlines returned to profit after the recession by slashing routes, cutting frequencies and raising fares on remaining flights. A glut of seats could prompt a reversal in prices and make it tougher to pass on the spiraling cost of jet fuel, said Chris Tarry, an independent airline analyst in London.


"It's better to have fewer seats and people being prepared to pay a bit more to fly than having excess capacity and not being able to recover the costs," said Tarry, who has followed the aviation industry for almost 30 years.


Air France's fuel costs increased by 1 billion euros ($1.4 billion) in the year to March 31 and by 186 million euros, or 15 percent, in the fourth quarter, when post-hedging fuel expenses rose 7 percent, the Paris-based company said today in an earnings statement. The bill may jump 26 percent this year.


As part of the winter shakeup, Air France will switch planes to seasonally busy cities such as Cape Town and Cancun, Mexico, it said, with Gourgeon adding that "it makes far more sense to use the planes in zones where the demand is stronger."


The measures will also include "right-sizing" the joint- venture fleet, the carriers said, without being specific. The venture is based around hubs in Amsterdam, Atlanta, Detroit, Minneapolis, New York, Paris and Rome and directly serves 26 gateways in North America and 33 in Europe.