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As Hedges Go Bust, Airlines Are Hit by Crude Drop

Delta Air Lines, which Tuesday morning announced that busted fuel hedges had resulted in a $155 million second-quarter loss, became the first in what could be a series of major carriers to take pain from an unexpected plunge in crude prices.

WTI crude futures have fallen more than 27 percent since their February high, taking the market by surprise and rendering airline hedges — originally intended to ease the economic pain of higher fuel prices — largely ineffective.

At Delta , the gyrations in crude not only created a loss related to fuel hedges that settled during the June quarter, which ends Saturday, but also contributed to what the company estimates will be an $800 million charge for its open hedging positions, which run through 2013.

United Continental Holdings , the nation’s largest carrier by available seat mile, is in a parallel position — though probably with smaller absolute losses, according to information from filings and people familiar with the matter. The airline has hedged between 31 and 36 percent of its expected consumption through options and collars on diesel, jet fuel, and other energy markets, according to securities filings, and was originally positioning for higher crude prices.

In keeping with its usual practice, United will issue second-quarter investor guidance in the coming days to reflect how sales and costs have impacted its performance over the past three months. That release, which could come as early as Wednesday, is likely to include new estimates for United’s overall seating capacity, how expensive jet fuel has been, and how revenue has held up, say the people familiar with the matter — all of which will impact overall results.

Ironically, Southwest Airlines , which took a small hit to its first-quarter results for being largely unhedged in a high-priced crude environment, may potentially be the best off this quarter. Because it had anticipated lower crude and resultant jet fuel prices, Southwest was essentially unhedged for the first half of this year, leaving it able to save money on fuel when crude plummeted. But the carrier’s hedging team may now be scrambling to remove the hedges it put on for the rest of 2012, given that crude prices continue to drift lower.

Late in trading Tuesday, Delta shares surged more than 6 percent, a move some analysts attributed to lower-than-expected hedging losses. Shares of United and Southwest were modestly higher.

-By CNBC's Kate Kelly With reporting from Dawn Giel
@KateKellyCNBC

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