The high cost of fuel hedging

After getting burned by an extreme drop in oil prices, airlines are returning warily to hedging.

By Kim Peterson Sep 14, 2010 2:21PM
Air travel © Christie & Cole/Corbis Fuel hedging was a lifesaver for many airlines as prices went sky-high in 2008. Smart hedging added $1 billion to Southwest Airlines' (LUV) bottom line that year.

But airlines were burned badly when oil prices collapsed, having locked in fuel purchases at what turned out to be high levels. Southwest lost some $400 million. US Airways (LCC) was in the hole for nearly that much.

Many airlines stopped hedging and are only now starting to return. US Airways hasn't hedged in two years and isn't going to start anytime soon, an executive said at a recent industry forum.

In the past, US Airways would start hedging 15 months in advance, according to Platts, a company that studies energy and metals information. But now it's too dangerous to make a fuel bet 15 months ahead of time.

"Trading 15 months forward forces US Air to pay today for 15 months' worth of today's price move," said the executive, Michael Baer. "We can only recover that cash on physical purchases over 15 months into the future, if prices remain where they are."

Oil hit nearly $150 a barrel in the middle of 2008 and has been in the $70 to $75 range over the past month.
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

126
126 rated 1
286
286 rated 2
474
474 rated 3
680
680 rated 4
626
626 rated 5
609
609 rated 6
620
620 rated 7
462
462 rated 8
304
304 rated 9
132
132 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
BIDUBAIDU Inc10
BXTHE BLACKSTONE GROUP L.P10
CELGCELGENE CORP10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.