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.
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