Elysee Module 18543 FR

UV6682
Rev. Mar. 1, 2016
2012 Fuel Hedging at JetBlue Airways
In January 2012, Helena Morales was updating her JetBlue Airways (JetBlue) research report. Morales, an
equity analyst, followed major U.S. airline carriers. JetBlue was a low-cost airline that had distinguished itself
by offering in-flight entertainment and other amenities. JetBlue had started its operations in 2000 and
experienced a remarkable growth rate, leading the company to go public in 2002 (NASDAQ: JBLU).
In 2005, JetBlue’s profits suffered a first hit due to rising jet fuel costs. Keeping an eye on jet fuel oil
prices was essential for an airlines analyst. Although airlines had applied fuel surcharges to the price of tickets
in the past, these surcharges were viable only when matched by competitors. Given the limited pass-through
to customers, fuel hedging protected the airline’s cost structure from spikes in jet fuel prices and allowed
airlines to follow their business plans. JetBlue entered into a variety of hedging instruments including swaps,
call options, and collar contracts with underlyings of jet fuel, crude, and heating oil. Some of these derivatives
could cost millions of dollars, however, and there was the risk that the airline would suffer negative effects
from a sharp decline in fuel prices.
Jet fuel prices passed the $3-per-gallon mark in 2011, the highest since 2008 (Exhibit 1 shows spot jet
fuel prices at a major trading hub: the U.S. Gulf Coast [USGC]). These levels were the result of a dramatic
year in the oil market due to the Arab Spring, civil war in Libya, and demand growth from China. In its
annual report, JetBlue reported that fuel costs were its largest operating expense, approaching nearly 40% of
total operating costs in 2011. Table 1 shows fuel consumption and costs for the previous three years:
Table 1. Fuel consumption and costs for 2009–2011.

2009 2010 2011
Gallons consumed (millions) 455 486 525
Total cost ($ millions) $945 $1,115 $1,664
Average price per gallon $2.08 $2.29 $3.17
Percentage of operating expenses 31.4% 32.4% 39.8%
Source: JetBlue annual report, 2011.
Fuel costs had increased as a percentage of JetBlue’s operating expenses in the previous years (Exhibit
2—Panel A). One reason for the increase was the airline’s expansion and the corresponding increased fuel
consumption (Exhibit 2—Panel B), but the main reason was the rise in the average price per gallon of jet
fuel.1
1 Total cost and average price per gallon in Table 1 include effective fuel hedging gains and losses.
This case was written by Associate Professor Pedro Matos. It was written as a basis for class discussion rather than to illustrate effective or ineffective
handling of an administrative situation. Copyright  2013 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used
in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School
Foundation.
This document is authorized for use only in Soon Leong's MBA - "Energy Risk Management" 2022 at ESCP - Europe School of Management - United Kingdom from May 2022 to Nov 2022.
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Morales took a detailed look at JetBlue’s Investor Update report released on October 26, 2011. The
company described hedging 45% of its fourth quarter 2011 consumption (Exhibit 3). She also looked at a
Bloomberg report that kept track of jet fuel hedging positions of other U.S., European, and Asian airlines
(Exhibit 4). With the exception of US Airways, all major U.S. airlines had hedged about half of their fuel
needs for the last quarter of the year; however, the situation was quite different for European and Asian
airlines. Southwest Airlines had been a pioneer in fuel hedging and had benefited from lower than average
fuel costs (Exhibit 4). From 2000 to 2010, it saved an estimated $3.5 billion in fuel costs due to hedging.2
Many of these airlines relied on West Texas Intermediate (WTI) crude oil hedges. JetBlue had used crude oil
derivatives contracts for more than half of its 2011 hedging (Exhibit 3). But there were concerns that airlines
would suffer losses because of WTI’s hedge ineffectiveness, which had been caused by a major development
in the oil market: WTI, the main U.S. oil price benchmark, had become less well correlated with the global
crude oil market (Exhibits 5 and 6).
In 2011, WTI started trading at a discount to the leading global price European benchmark Brent crude
(Brent) due to an oil glut in Cushing, Oklahoma—the physical delivery hub for the WTI oil futures contracts
for the Chicago Mercantile Exchange Group (CME Group). Cushing was known as the “pipeline crossroads
of the world,” but it was facing a bottleneck. Brent’s premium to WTI reached a record level of almost $30
per barrel in September 2011. Jet fuel prices had tracked the price of Brent, instead of WTI, for much of 2011
(Exhibits 5 and 6). The WTI dislocation affected jet fuel hedging strategies because of basis risk (i.e., that the
jet fuel price would not change perfectly in tandem with the value of the WTI derivative instrument used to
hedge it).
Could the Brent-WTI premium be a temporary Figure 1. Typical mix of usable refined products.
phenomenon? The oil glut in Cushing was due to
record crude oil production from the Bakken shale
formation and Canadian oil sands. But in
November, there were signs that transportation
constraints were easing after news of the coming
reversal of the Seaway Pipeline, and the price of the
Brent-WTI premium fell almost $20 per barrel;
however, the spread ended the year close to $10
per barrel, still high by historical standards. Morales
knew she had to cover JetBlue’s jet fuel hedging
strategy for 2012. Would JetBlue continue using
WTI for its hedges, or would it switch to Brent or
heating oil?
Basics of Jet Fuel
Aircrafts were powered by kerosene-type jet Data source: U.S. Energy Information Administration, “Oil:
Crude and Petroleum Products Explained,”
fuel, which was distilled from crude oil. The http://www.eia.gov/energyexplained/index.cfm?page=oil
petroleum first extracted from the ground was _home.
crude oil that was transported by pipeline or ship
to be refined closer to consumers. Refineries used a process of distillation to separate crude oil into usable
refined products. The typical mix is shown in Figure 1. A 42-gallon barrel (bbl.) of U.S. crude oil provided
2 Susan Carey, “Price Rises for Fuel Threaten Airline Net,” Wall Street Journal, January 13, 2011.
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about 45 gallons of petroleum products, approximately 10% of which was jet fuel. In the spectrum, jet fuel
was categorized as a middle distillate between light distillates (e.g., gasoline) and heavy distillates and residuum
(e.g., asphalt).
As of 2011, there were no exchange-traded futures contracts directly on jet fuel, and trading was
concentrated in crude oil benchmarks (Exhibit 7). The first one was WTI oil produced in the United States
and traded in the CME Group.3 WTI futures were the world’s largest-volume futures contract on a
commodity, and the contracts were physically settled. The second major benchmark was Brent, produced in
the North Sea and the underlying for futures traded electronically in the Intercontinental Exchange (ICE).4
Brent contracts were financially settled. Despite the small output compared to other grades such as Arab
Light, Urals, or Iranian Heavy, trading was concentrated in WTI and Brent because their pricing was
transparent. Exhibit 7 shows the exchange-traded futures contracts on other middle distillates such as
heating oil futures and light distillates such as gasoline, but these contracts had much lower trading volumes.
The process of distillation linked the prices of refined petroleum such as jet fuel to crude oil, as shown in
the high correlation in Exhibit 5. The refining margin or “crack spread” was defined as the difference
between the price of refined petroleum such as jet fuel less the price of crude oil. See Panel B of Exhibit 5.
At the end of December 2011, oil refiners were getting more than $23 a barrel (or $0.5 a gallon) in profit for
refining crude oil into jet fuel. From 2007 to 2011, the crack spread had oscillated from $3.9 to a maximum of
$41.9 per barrel (from $0.09 to $1 per gallon). This variation constituted basis risk for any jet fuel hedging
strategy based on crude oil derivatives. The term “basis risk” was used to describe the risk that the value of
the commodity being hedged may not change perfectly in tandem with the value of the derivative instrument
used to hedge the price risk. In this case, basis risk occurred because there was a mismatch in the quality of
the underlying products because jet fuel and crude oil were different commodities.5
The Divergence between WTI and Brent Oil Prices
Brent was a low-sulfur (sweet) crude oil used to price two-thirds of the world’s internationally traded
crude oil supplies, according to ICE. In contrast to Brent’s waterborne cargo market where crude oil arrived
in discrete quantities, WTI was a midcontinent pipeline market where crude oil flowed continuously at near-
constant rates. Exhibit 8 shows the location of Cushing—the physical settlement point for WTI oil futures—
and the Brent oilfield. As of 2011, Cushing was landlocked, and oil only flowed north to refineries in Chicago,
not south to the USGC. Brent was a more flexible waterborne market, but oil production from the North Sea
was expected to shrink.
In 2011, Brent traded well above WTI (Exhibit 5). The widening of the Brent price premium to WTI
was unusual. In the past, Brent was more likely to trade at a slight discount of $1 to $2 to WTI, due to WTI’s
relatively higher quality. The rising crude production from the Bakken shale formation and Canadian oil sands
that had created the oil glut in Cushing turned the typical discount of Brent over WTI into a premium, and
the Brent-WTI spread reached a record of $29.70 per barrel on September 22, 2011.
3 The contract traded in units of 1,000 barrels (1,000 oil barrels = 42,000 U.S. gallons), and the delivery point was Cushing. See contract
specifications at the CME Group’s website, http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html.

4 One contract equaled 1,000 oil barrels, and delivery was cash settled. See contract specifications at the Intercontinental Exchange’s website,
https://www.theice.com/productguide/ProductDetails.shtml?specId=219.
5 Other types of basis risk are due to mismatch in time of the hedge and locational mismatch in delivery point between the derivatives contract and
the product being hedged.
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In October and November, there were signs that transportation constraints were beginning to ease, and
the Brent price premium to WTI narrowed. On November 16, ConocoPhillips agreed to sell its 50% share of
the Seaway crude oil pipeline to Enbridge Inc. The new ownership announced that it intended to reverse oil
flows to run north to south starting as early as the second quarter of 2012 to partially alleviate the oil glut by
allowing crude oil to move from the Cushing hub to refineries located on the USGC. Following the
announcement of the reversal, the difference between the spot price of Brent crude oil and WTI fell to under
$10 per barrel in December 2011.
Yet in a report at that time, the U.S. Energy Information Administration (EIA) had cast doubt on
whether the situation could be resolved:
The reversal of the Seaway pipeline will not eliminate bottlenecks moving WTI’s crude oil to
downstream markets. With crude oil production increases from Canada and the Bakken and other
shale formations in the coming years expected to continue, the market will still be dependent on rail
as the marginal mode of transportation, meaning some discount will be required to account for the
costs of moving inland U.S. crudes to the Gulf Coast.6
Hedging Jet Fuel Price Risk at JetBlue
Fuel represented about 40% of JetBlue’s costs; thus the airline viewed its fuel hedging as an insurance
policy. Airlines found it hard to apply fuel surcharges to the price of tickets if these were not matched by
competitors.7 Given the limited pass-through to customers, fuel hedging protected the airline’s cost structure.
But purchasing the derivatives could be costly, and there was the risk that the airline would suffer negative
effects as a result of a sharp decline in fuel prices. In addition, there was the issue of basis risk between jet
fuel and the hedging instruments based on crude oil prices because the crack spread fluctuated and added to
airline costs.
JetBlue’s fuel hedging book combined swaps and options. The company disclosed details of advanced
fuel derivative contracts for each quarter in 2011 (Exhibit 9). Airlines preferred these over-the-counter
derivatives to exchange-traded futures because they were customizable. The hedge positions were mostly
negotiated with banks, which would normally offset their positions with contracts with other market
participants (e.g., oil producers) or directly using CME Group or ICE exchange-traded futures and options.
WTI calls were the right to buy a particular WTI asset or a fixed strike price at a time until a maturity
date. There were some WTI exchange-traded options at the CME Group (previously called the NYMEX),
but it was likely that JetBlue was using over-the-counter options where the settlement price was based on the
average price over a given period (instead of the exact spot price at expiration). Buying the call option would
protect the airline against a rise in the price of WTI crude oil. Of course, this would be a cross-market hedge
involving some basis risk, as its natural position was in jet fuel, but it would work so long as WTI and jet fuel
price changes stayed highly correlated. JetBlue would have to pay an option premium for these contracts,
which were a form of insurance policy. For example, on October 26, 2011, the company had reported that it
had hedged the equivalent of 7% of its 2011Q4 jet fuel consumption at a price of $92 per barrel (Exhibit 9).
As the WTI spot price had increased and closed at $98.83 per gallon (Exhibit 6) at the end of December
6 U.S. Energy Information Administration, “Spread between WTI and Brent Prices Narrows on Signs of Easing Transportation Constraints,” Today
in Energy, December 5, 2011, http://www.eia.gov/todayinenergy/detail.cfm?id=4170 (accessed May 14, 2013).

7 Freight carriers UPS and FedEx did not hedge fuel. Almost a duopoly, they passed through fuel increases using fuel surcharges. For example,
FedEx developed an indexed fuel surcharge policy based on the average spot price for jet fuel, which it published on its website.
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2011, JetBlue had a gain on this hedge, which would keep JetBlue’s cost at $92 per barrel (not accounting for
the premium).
A WTI (or heating oil) collar was the combination of a put and call option whose underlying asset was
the WTI crude oil (or heating oil) spot price. It involved the purchase of call options where a premium was
paid up front, but if prices increased, JetBlue would be protected. If prices decreased, then it lost the
premium cost. The cost of these call options was offset with the sale of put options. Using the collar strategy,
JetBlue would create a hedged position whereby it would have a minimum (floor) and maximum (cap) price
on the underlying commodity. For example, on October 26, 2011, the company had reported that it had
hedged the equivalent of 9% of its 2011Q4 jet fuel consumption at a price with a cap at $100 per barrel and a
floor at $81 per barrel (Exhibit 9). The WTI spot price had increased and closed at $98.83 per gallon
(Exhibit 6) at the end of December 2011, so it had not gained or lost from this hedge. This did not account
for the collar net premium. The relative cost of put and call options depended on strike prices and volatility
levels. A “zero-cost collar” could be structured so that the premium from selling the put option could offset
the premium for the call option.
USGC jet fuel swaps were agreements to exchange the floating price of spot USGC jet fuel for a fixed
price over a certain period of time. The differences between fixed and floating prices were typically cash
settled. A swap can be thought of as a package of forward purchase agreements. JetBlue would be typically
the fixed-price payer, thus allowing it to hedge the fuel price risk. For example, on October 26, 2011, the
company had reported that it had hedged 12% of its 2011Q4 jet fuel consumption at a fixed price of $3.00
per gallon (Exhibit 9). The spot price of USGC jet fuel had fallen to $2.917 per gallon (Exhibit 6) by
December 2011, so it had suffered a loss on this hedge.
JetBlue’s fuel hedging strategy had evolved over the years (Exhibit 3). The company’s approach to fuel
hedging was to enter into hedges on a discretionary basis without specific targets. It hedged less in 2009 when
oil prices were low and increased the percentage hedged again in 2010 and 2011. Dynamic strategies were
based on the idea that oil prices followed a mean-reverting process. Ideally, airlines wanted to lock in prices at
the low point in the cycle while capping prices at the high end but take advantage of eventual price declines.
It was not clear whether the airline stood to gain from adjusting its strategy. Additionally, JetBlue had
switched between derivatives written on different oil products. It had moved its hedging from heating oil
between 2007 to 2009 to crude oil derivatives in 2010 and 2011, but it recently reverted to heating oil
derivatives and directly to jet fuel swaps.
For derivative positions to be treated as cash flow hedges for accounting purposes, it was important that
the hedges were effective. Testing for hedge effectiveness was ruled by the Statement of Financial Accounting
Standards. In its annual report, JetBlue stated its procedures in this respect (Exhibit 10). Morales wondered
whether hedge ineffectiveness of WTI derivatives contracts might become an issue for JetBlue’s 2012 fuel
hedges and, if so, whether that would be another reason for JetBlue to consider switching to Brent or heating
oil derivatives.
The Way Forward
Most U.S. airlines used WTI as the basis for their fuel hedges; however, for most of 2011, jet fuel prices
had been tracking Brent more closely than WTI, and the increase in the jet-fuel-to-WTI refining margin was
disrupting hedging programs. Several airlines reported large markdowns for fuel hedge ineffectiveness in the
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third quarter of 2011. United Continental reported a $56 million markdown. “During the quarter, WTI crude
oil prices decreased while jet fuel prices remained high,” United Continental declared in a statement
accompanying its quarterly results.8
In 2011, after many years of hedging gains, Southwest took a $227 million noncash markdown related to
the hedge ineffectiveness of its hedge portfolio in large part due to the Brent-WTI divergence. The company
was more optimistic for 2012. “To the extent we see WTI and Brent coming together, I think that the hedges
we have in place will really give us much better protection than they were when WTI was trading at a
discount,” said Southwest Airlines CFO Laura Wright.9
Delta Air Lines decided to switch its hedges from WTI to Brent in the spring of 2011. “We’ve needed to
restructure our hedge position,” said Delta Air Lines President Ed Bastian. “Given the fact that jet fuel is
now being prompted and priced off of those Brent prices, we’ve needed to go in and reorient our hedge book
toward Brent and heating oils, as compared to WTI,” Bastian told an investor conference in March 2011.10
Some airlines were not affected by this issue. AMR Corporation, the parent company of American
Airlines, had not been influenced by the Brent-WTI spread because it hedged using a refined product. US
Airways did not hedge and bought jet fuel on the open market. Hedging was “a large wealth transfer from
industrial companies to Wall Street trading desks,” Scott Kirby, president of US Airways, said in a Wall Street
Journal interview. “It’s an incredibly expensive insurance policy.”11
For 2012, many market participants expected the Brent-WTI spread to narrow. As the spread tightened,
it could hurt Delta Air Lines and others pricing against Brent. But another bottleneck could emerge at
Cushing, depending on what happened to projects in Canada and North Dakota. There was, of course, the
risk that these analysts were wrong, and WTI would continue to decouple from global oil markets. Increasing
Canadian supplies and a lack of export pipelines to the USGC would lead to inventory buildup around
Cushing, and pipelines were unlikely to be reversed. The poor infrastructure of a land-locked delivery location
could lead to the demise of WTI as the main oil benchmark. Heating oil prices, such as WTI, were also too
domestically driven. Brent, on the other hand, was a water-borne contract and could potentially start fulfilling
the key index role for oil prices.
Morales wondered whether JetBlue would continue to stick with WTI as a basis for its 2012 fuel hedges
or switch to an alternative such as Brent or heating oil.
8 Alexander Osipovich, Risk.net, http://www.risk.net/energy-risk/news/2136013/wti-brent-spread-volatility-disrupts-hedging-programmes

(accessed May 13, 2013).
9 Karen Jacobs, “Narrowing WTI/Brent Spread Could Aid U.S. Airlines,” Reuters, November 23, 2012.
10 Dan Strumpf, “Oil Price Quirk Causes Delta to Rethink Fuel Hedges,” Dow Jones Newswires, March 31, 2011.
11 Carey.
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Exhibit 1
USGC Kerosene-Type Jet Fuel Spot Prices, 1990–2011 (End-of-Month)
Data source: “Petroleum & Other Liquids, Spot Prices,” U.S. Energy Information Administration website,
http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm.
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Exhibit 2
JetBlue Airways—Jet Fuel Cost and Consumption (2007–2011, Quarterly)
Panel A: JetBlue Airways—Jet fuel cost as percentage of operating expense (quarterly).
Data source: U.S. Department of Transportation, “Air Carrier Financial: Schedule P-6
http://www.transtats.bts.gov/DL_SelectFields.asp?Table_ID=291&DB_Short_Name=Air Carrier
Financial .
Panel B: JetBlue Airways—Jet fuel consumption in millions of gallons (quarterly).
Data source: U.S. Department of Transportation, “Airline Fuel Cost and Consumption (U.S. Carriers—
Scheduled) January 2000–February 2013,” http://www.transtats.bts.gov/fuel.asp?pn=1.
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Exhibit 3
JetBlue—Fuel Percentage Hedged (2007–2012, Quarterly)
Source: Created by case writer based on JetBlue Airways investor updates (2007Q1–2012Q3).
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Exhibit 3 (continued)
JetBlue—Fuel Percentage Hedged (2007–2012, Quarterly)
% Est. Consumption Hedged: current quarter

% Hedged—Crude Oil Millions of Gallons Hedged Jet Fuel
% Hedged—Heating Oil % Hedged—Jet Fuel % Not Hedged
(WTI) (in current quarter) ($ per gal.)
2007Q1 67% 72 33% 2.02
2007Q2 11% 42% 11% 73 36% 2.09
2007Q3 11% 40% 60 49% 2.29
2007Q4 47% 53 53% 2.67
2008Q1 35% 41 65% 3.06
2008Q2 46% 54 54% 4.02
2008Q3 46% 53 54% 3.02
2008Q4 40% 43 60% 1.32
2009Q1 9% 10 91% 1.34
2009Q2 9% 10 91% 1.79
2009Q3 9% 10 91% 1.79
2009Q4 9% missing data 91% 2.09
2010Q1 15% 5% 44% 76 36% 2.19
2010Q2 18% 5% 19% 52 58% 1.99
2010Q3 18% 5% 19% missing data 58% 2.24
2010Q4 19% 24% 54 57% 2.53
2011Q1 29% 5% 3% 44 63% 3.16
2011Q2 36% 5% 2% 57 57% 3.00
2011Q3 32% 9% 7% 67 52% 2.84
2011Q4 21% 10% 14% 60 55% 2.92
2012Q1* 7% 7% 9% 31 (est.) 77%
2012Q2* 6% 7% 9% 31 (est.) 78%
2012Q3* 4% 6% 8% 31 (est.) 82%
2012Q4*
*Information as of 2011Q4, at which time the hedging programs for 2012 were still not fully in place.
Notes: “% Hedged” is the percentage of fuel consumption hedged using derivatives for the current quarter as reported in each quarter.
Sources: “JBLU Investor Relations—Investor Update,” JetBlue website, http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-investorUpdate. Jet fuel spot prices are from:
“Petroleum & Other Liquids, Spot Prices.”
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Exhibit 4
Jet Fuel Hedging at Major Airlines
Panel A: Jet fuel hedging positions for major airlines.

Region Company Disclosure Date % Hedged Hedging Period
U.S. Alaska Air Group Inc. 10/20/2011 50% Fourth quarter
American Airlines 10/19/2011 52% Fourth quarter
Delta Air Lines Inc. 10/25/2011 40% First half 2012
Hawaiian Airlines 10/18/2011 56% Fourth quarter
JetBlue Airways Corporation 10/26/2011 45% Fourth quarter
Southwest Airlines Co. 10/20/2011 hedged* Fourth quarter
United Continental Holdings Inc. 10/27/2011 56% Fourth quarter
US Airways Group Inc. 10/27/2011 0% Fourth quarter
WestJet Airlines 11/9/2011 24% Fourth quarter
Europe Air France-KLM Group November 2011 57% October to December 2011
Aer Lingus Group Plc. February 2012 86% January to March 2012
Deutsche Lufthansa AG March 2012 74% 2012
EasyJet Plc. March 2012 75% Year to September 2012
Ryanair Holdings Plc. January 2012 90% Year to March 2012
SAS Group May 2012 50% April to June 2012
Asia Air China March 2012 20% FY11/12
Cathay Pacific March 2011 27% FY11/12
China Airlines March 2011 0% FY11/12
China Eastern Airlines March 2011 0% FY11/12
China Southern Airlines March 2011 0% FY11/12
EVA Airways Corporation March 2011 10% FY11/12
Jet Airways March 2011 0% FY11/12
Korean Air March 2011 8% FY11/12
Qantas Airways March 2011 27% FY11/12
Singapore Airlines March 2011 10% FY11/12
*Exact percentage not disclosed in the earnings release.
Data sources: Bloomberg, “Jet Fuel Hedging Positions for U.S., Canadian Airlines,” November 10, 2011; “Jet Fuel Hedging Positions for
Europe-Based Airlines,” May 3, 2012; HSBC Global Research, “Asian Airlines—Fueling a Shift to Premium Carriers,” March 3, 2011.
Page 12 UV6682
Panel B: Airline fuel cost for JetBlue and major U.S. airlines (2000–2011, $ per gallon).
Data source: Bureau of Transportation Statistics (F41 Schedule P12A) http://www.transtats.bts.gov/fuel.asp?pn=0&display=data1.
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Exhibit 5
Jet Fuel, Heating Oil, and Crude Oil (WTI and Brent) Spot Prices (2007–2011, Monthly)
Panel A: Spot prices.
Data source: “Petroleum & Other Liquids, Spot Prices,” U.S. Energy Information Administration website,
http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm.
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Jet Fuel, Heating Oil, and Crude Oil (WTI and Brent) Spot Prices (2007–2011, Monthly)
Panel B: Difference in prices between Jet Fuel and crude oil (crack spread) and heating oil.
Source: Case writer calculations based on prices in Panel A.
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Exhibit 6
Jet Fuel, Heating Oil, WTI, and Brent Crude Oil Spot Prices, 2007–2011 (Monthly)
JET FUEL HEATING OIL

WTI BRENT
(U.S. Gulf Coast (New York Harbor
(Cushing, OK WTI (Europe Brent Spot
Year Kerosene-Type Jet No. 2 Heating Oil
Spot Price FOB, Price FOB, Dollars
Fuel Spot Price FOB, Spot Price FOB,
Dollars per Barrel) per Barrel)
Dollars per Gallon) Dollars per Gallon)
Jan-2007 1.759 58.17 56.52 1.681
Feb-2007 1.853 61.78 59.39 1.781
Mar-2007 2.017 65.94 68.47 1.871
Apr-2007 2.049 65.78 67.23 1.897
May-2007 2.044 64.02 68.18 1.892
Jun-2007 2.09 70.47 72.22 2.023
Jul-2007 2.198 78.2 77.01 2.095
Aug-2007 2.135 73.98 72.29 2.037
Sep-2007 2.288 81.64 80.97 2.199
Oct-2007 2.592 94.16 89.87 2.506
Nov-2007 2.568 88.6 88.71 2.499
Dec-2007 2.673 95.95 93.68 2.648
Jan-2008 2.572 91.67 91.58 2.523
Feb-2008 2.915 101.78 100.9 2.806
Mar-2008 3.061 101.54 102.33 3.078
Apr-2008 3.329 113.7 111.12 3.195
May-2008 3.736 127.35 127.85 3.647
Jun-2008 4.02 139.96 138.4 3.89
Jul-2008 3.554 124.17 124.1 3.435
Aug-2008 3.296 115.55 113.49 3.15
Sep-2008 3.022 100.7 93.52 2.851
Oct-2008 2.094 68.1 60 2.085
Nov-2008 1.76 55.21 47.72 1.696
Dec-2008 1.32 44.6 35.82 1.314
Jan-2009 1.416 41.73 44.17 1.437
Feb-2009 1.265 44.15 44.41 1.271
Mar-2009 1.341 49.64 46.13 1.336
Apr-2009 1.294 50.35 50.3 1.299
May-2009 1.672 66.31 64.98 1.636
Jun-2009 1.788 69.82 68.11 1.715
Jul-2009 1.831 69.26 70.08 1.793
Aug-2009 1.781 69.97 69.02 1.773
Sep-2009 1.794 70.46 65.82 1.805
Oct-2009 1.976 77.04 74.91 1.965
Nov-2009 2.004 77.19 77.77 1.984
Dec-2009 2.088 79.39 77.91 2.109
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JET FUEL HEATING OIL

WTI BRENT
(U.S. Gulf Coast (New York Harbor
(Cushing, OK WTI (Europe Brent Spot
Year Kerosene-Type Jet No. 2 Heating Oil
Spot Price FOB, Price FOB, Dollars
Fuel Spot Price FOB, Spot Price FOB,
Dollars per Barrel) per Barrel)
Dollars per Gallon) Dollars per Gallon)
Jan-2010 1.91 72.85 71.2 1.894
Feb-2010 2.055 79.72 76.36 2.02
Mar-2010 2.188 83.45 80.37 2.162
Apr-2010 2.324 86.07 86.19 2.265
May-2010 2.039 74 73 2.006
Jun-2010 1.993 75.59 74.94 1.975
Jul-2010 2.093 78.85 77.5 2.038
Aug-2010 2.01 71.93 75.51 1.966
Sep-2010 2.239 79.95 80.77 2.239
Oct-2010 2.253 81.45 82.47 2.211
Nov-2010 2.291 84.12 86.02 2.288
Dec-2010 2.528 91.38 93.23 2.546
Jan-2011 2.742 90.99 98.97 2.723
Feb-2011 2.998 97.1 112.27 2.928
Mar-2011 3.161 106.19 116.94 3.098
Apr-2011 3.368 113.39 126.59 3.263
May-2011 3.134 102.7 117.18 3.049
Jun-2011 2.996 95.3 111.71 2.936
Jul-2011 3.161 95.68 115.93 3.086
Aug-2011 3.113 88.81 116.48 3.068
Sep-2011 2.844 78.93 105.42 2.781
Oct-2011 3.028 93.19 108.43 3.04
Nov-2011 3.001 100.36 111.22 3.012
Dec-2011 2.917 98.83 108.09 2.917
Data source: http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm.
Page 17 UV6682
Exhibit 7
Most Heavily Traded Energy Futures Contracts (October 2011)
CME Group Futures—Monthly

Volume of Contracts
Light sweet crude oil (WTI) 14,785,297
Natural gas futures (Henry Hub) 7,199,901
Heating oil 2,964,162
RBOB gasoline 2,791,760
PJM financially settled electricity 211,304
Data source: CME Group, “CMEG Exchange Volume Report—Monthly October 2011,”
http://www.cmegroup.com/wrappedpages/web_monthly_report/Web_Volume_Report_CMEG.pdf.
ICE Europe Futures—

Monthly Volume of
Contracts
Brent 12,454,684
Gas oil 6,655,441
WTI 4,132,829
Heating oil 77,063
RBOB gasoline 79,862
Coal 117,818
EU natural gas 577,605
Electricity 915
Emissions 561,522
Data source: Intercontinental Exchange, “ICE Futures Europe—Futures Monthly Volume,”
https://www.theice.com/marketdata/reports/ReportCenter.shtml#report/7.
Page 18 UV6682
Exhibit 8
Physical Location of WTI versus Brent Crude Oil
Panel A: Location of Cushing, OK (settlement point for WTI).
Panel B: Location of the Brent oilfield.
Source: International Energy Agency, “Oil Supply Security 2007,”

http://www.iea.org/publications/freepublications/publication/oil_security.pdf.
Page 19 UV6682
Exhibit 9
JetBlue—Fuel Hedges (2011Q1 to 2011Q4)
Investor Update:
1/27/2011 2011Q1 2011Q2 2011Q3 2011Q4
Gallons (in millions) 44 50 45 28
(est. % of consumption) 37% 38% 31% 21%
18% in crude call options with 21% in crude call options with the average 18% in crude call options with the 7% in crude call options with
Hedge 1 the average cap at $92/bbl. cap at $93/bbl. average cap at $94/bbl. the average cap at $92/bbl.
11% in crude collars with the 10% in crude collars with the average cap at 9% in crude collars with the average 9% in crude collars with the
Hedge 2 average cap at $99/bbl. and the $100/bbl. and the average put at $80/bbl. cap at $100/bbl. and the average put average cap at $100/bbl. and
average put at $82/bbl. at $80/bbl. the average put at $81/bbl.
5% in heat collars with the 5% in crude three-way collars with the 4% in crude three-way collars with 5% in crude three-way collars
average cap at $2.61/gal. and the average purchased call at $100/bbl., the the average purchased call at with the average purchased
Hedge 3 average put at $2.21/gal. average sold call at $110/bbl. and the $100/bbl., the average sold call at call at $100/bbl., the average
average put at $85/bbl. $110/bbl. and the average put at sold call at $110/bbl. and the
$83/bbl. average put at $80/bbl.
3% in USGC jet fuel swaps at an 2% in USGC jet fuel swaps at an average of
Hedge 4 average of $2.29/gal. $2.32/gal.
Estimated fuel gallons
119
consumed (in millions)
Estimated average fuel
price per gallon, net of $2.84
hedges
Page 20 UV6682
Investor Update:
4/21/2011 2011Q2 2011Q3 2011Q4 2012Q1
(est. % of
43% 36% 26%
consumption) 8%
21% in crude call options with 18% in crude call options with the average 7% in crude call options with the 3% in crude call options
Hedge 1 the average cap at $93/bbl. cap at $94/bbl. average cap at $92/bbl. with the average cap at
$99/bbl.
10% in crude collars with the 9% in crude collars with the average cap at 10% in crude collars with the 5% in crude collars with
average cap at $100/bbl. and the $100/bbl. and the average put at $80/bbl. average cap at $100/bbl. and the the average cap at
Hedge 2 average put at $80/bbl. average put at $81/bbl. $98/bbl. and the average
put at $78/bbl.
5% in crude three-way collars 5% in crude three-way collars with the 5% in crude three-way collars with
with the average purchased call average purchased call at $100/bbl., the the average purchased call at
Hedge 3 at $100/bbl., the average sold average sold call at $110/bbl. and the $100/bbl., the average sold call at
call at $110/bbl. and the average average put at $83/bbl. $110/bbl. and the average put at
put at $85/bbl. $80/bbl.
5% in heat collars with the 4% in heat collars with the average cap at 4% in heat collars with the average
Hedge 4 average cap at $3.24/gal. and the $3.27/gal. and the average put at $2.87/gal. cap at $3.31/gal. and the average put
average put at $2.84/gal. at $2.91/gal.
2% in USGC jet fuel swaps at an
Hedge 5 average of $2.32/gal.
Estimated fuel
gallons consumed (in 133
millions)
Estimated average
fuel price per gallon, $3.37
net of hedges
Page 21 UV6682
Investor Update:
7/26/2011 2011Q3 2011Q4 2012Q1 2012Q2
(est. % of
48% 38% 18%
consumption) 16%
18% in crude call options with the 7% in crude call options with the 3% in crude call options with the 2% in crude call options with
Hedge 1 average cap at $94/bbl. average cap at $92/bbl. average cap at $99/bbl. the average cap at $99/bbl.
9% in crude collars with the average cap 9% in crude collars with the average 5% in crude collars with the 5% in crude collars with the
Hedge 2 at $100/bbl. and the average put at cap at $100/bbl. and the average put average cap at $98/bbl. and the average cap at $97/bbl. and
$80/bbl. at $81/bb average put at $78/bbl. the average put at $78/bbl.
5% in crude three-way collars with the 5% in crude three-way collars with 8% in heat collars with the average 7% in heat collars with the
average purchased call at $100/bbl., the the average purchased call at cap at $3.31/gal. and the average average cap at $3.27/gal. and
Hedge 3 average sold call at $110/bbl. and the $100/bbl., the average sold call at put at $2.91/gal. the average put at $2.87/gal.
average put at $83/bbl. $110/bbl. and the average put at
$80/bbl.
9% in heat collars with the average cap 9% in heat collars with the average 2% in USGC jet fuel swaps at an 2% in USGC jet fuel swaps at
Hedge 4 at $3.26/gal. and the average put at cap at $3.30/gal. and the average put average of $3.15/gal. an average of $3.14/gal.
$2.86/gal. at $2.90/gal.
7% in USGC jet fuel swaps at an 8% in USGC jet fuel swaps at an
Hedge 5 average of $3.03/gal. average of $3.03/gal.
Estimated fuel
gallons consumed (in 142
millions)
Estimated average
fuel price per gallon, $3.33
net of hedges
Page 22 UV6682
Investor Update:
10/26/2011 2011Q4 2012Q1 2012Q2 2012Q3
(est. % of
45% 23% 22%
consumption) 18%
7% in crude call options with the 2% in crude call options with 2% in crude call options with the 4% in crude collars with the
Hedge 1 average cap at $92/bbl. the average cap at $99/bbl. average cap at $99/bbl. average cap at $97/bbl. and
the average put at $78/bbl.
9% in crude collars with the average cap 5% in crude collars with the 4% in crude collars with the average 6% in heat collars with the
Hedge 2 at $100/bbl. and the average put at average cap at $98/bbl. and cap at $97/bbl. and the average put at average cap at $3.28/gal. and
$81/bbl. the average put at $78/bbl. $78/bbl. the average put at $2.87/gal.
5% in crude three-way collars with the 7% in heat collars with the 7% in heat collars with the average cap 6% in USGC jet fuel swaps at
average purchased call at $100/bbl., the average cap at $3.27/gal. and at $3.27/gal. and the average put at an average of $3.05/gal.
Hedge 3 average sold call at $110/bbl. and the the average put at $2.87/gal. $2.87/gal.
average put at $80/bbl.
10% in heat collars with the average cap 7% in USGC jet fuel swaps at 7% in USGC jet fuel swaps at an 2% in USGC jet fuel collars
at $3.30/gal. and the average put at an average of $3.03/gal. average of $3.02/gal. with the average cap at
Hedge 4 $2.90/gal. $3.02/gal. and the average put
at $2.72/gal.
12% in USGC jet fuel swaps at an 2% in USGC jet fuel collars 2% in USGC jet fuel collars with the
average of $3.00/gal. with the average cap at average cap at $3.01/gal. and the
Hedge 5 $3.04/gal. and the average put average put at $2.71/gal.
at $2.74/gal.
2% in USGC jet fuel collars with the
Hedge 6 average cap at $3.04/gal. and the
average put at $2.74/gal.
Estimated fuel gallons 133
consumed (in millions)
Estimated average fuel
price per gallon, net of $3.23
hedges
Source: “JBLU Investor Relations—Investor Update,” JetBlue website, http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-investorUpdate.
Page 23 UV6682
Exhibit 10
JetBlue Airways—Disclosure on Accounting Treatment of Fuel Hedges
“The Derivatives and Hedging topic is a complex accounting standard and requires that we develop and maintain a
significant amount of documentation related to (1) our fuel hedging program and strategy, (2) statistical analysis supporting a
highly correlated relationship between the underlying commodity in the derivative financial instrument and the risk being hedged
(i.e., aircraft fuel) on both a historical and prospective basis, and (3) cash flow designation for each hedging transaction executed,
to be developed concurrently with the hedging transaction. This documentation requires that we estimate forward aircraft fuel prices
since there is no reliable forward market for aircraft fuel. These prices are developed through the observation of similar commodity
futures prices, such as crude oil and/or heating oil, and adjusted based on variations to those like commodities. Historically, our
hedges have settled within 24 months; therefore, the deferred gains and losses have been recognized into earnings over a relatively
short period of time.
(…) We attempt to obtain cash flow hedge accounting treatment for each aircraft fuel derivative that we enter into. This
treatment is provided for under the Derivatives and Hedging topic of the Codification, which allows for gains and losses on the
effective portion of qualifying hedges to be deferred until the underlying planned jet fuel consumption occurs, rather than recognizing
the gains and losses on these instruments into earnings during each period they are outstanding. The effective portion of realized
aircraft fuel hedging derivative gains and losses is recognized in fuel expense in the period the underlying fuel is consumed.
Ineffectiveness results, in certain circumstances, when the change in the total fair value of the derivative instrument differs
from the change in the value of our expected future cash outlays for the purchase of aircraft fuel and is recognized immediately in
interest income and other. Likewise, if a hedge does not qualify for hedge accounting, the periodic changes in its fair value are
recognized in the period of the change in interest income and other. When aircraft fuel is consumed and the related derivative
contract settles, any gain or loss previously recorded in other comprehensive income is recognized in aircraft fuel expense. All cash
flows related to our fuel hedging derivatives are classified as operating cash flows.”
Source: JetBlue annual report, 2011.

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UV6682

Rev. Mar. 1, 2016

2012 Fuel Hedging at JetBlue Airways

Table 1. Fuel consumption and costs for 2009–2011.

Basics of Jet Fuel

The Divergence between WTI and Brent Oil Prices

specifications at the CME Group’s website, http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html.

the product being hedged.

Hedging Jet Fuel Price Risk at JetBlue

in Energy, December 5, 2011, http://www.eia.gov/todayinenergy/detail.cfm?id=4170 (accessed May 14, 2013).

The Way Forward

8 Alexander Osipovich, Risk.net, http://www.risk.net/energy-risk/news/2136013/wti-brent-spread-volatility-disrupts-hedging-programmes

Panel A: JetBlue Airways—Jet fuel cost as percentage of operating expense (quarterly).

Panel B: JetBlue Airways—Jet fuel consumption in millions of gallons (quarterly).

JetBlue—Fuel Percentage Hedged (2007–2012, Quarterly)

% Est. Consumption Hedged: current quarter

Panel A: Jet fuel hedging positions for major airlines.

Data source: Bureau of Transportation Statistics (F41 Schedule P12A) http://www.transtats.bts.gov/fuel.asp?pn=0&display=data1.

Panel A: Spot prices.

Source: Case writer calculations based on prices in Panel A.

JET FUEL HEATING OIL

JET FUEL HEATING OIL

CME Group Futures—Monthly

ICE Europe Futures—

Panel A: Location of Cushing, OK (settlement point for WTI).

Panel B: Location of the Brent oilfield.

Source: International Energy Agency, “Oil Supply Security 2007,”

JetBlue—Fuel Hedges (2011Q2 to 2012Q1)

JetBlue—Fuel Hedges (2011Q3 to 2011Q2)

JetBlue—Fuel Hedges (2011Q4 to 2012Q3)

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