In a story in our September issue, we discussed how airlines hedge their fuel usage in order to protect themselves from higher costs. We mentioned that the expense of hedging caused many airlines to take their chances with the market, in many cases to their detriment. Southwest, one of the only airlines to record a second quarter profit, has one of the industry’s most aggressive hedging programs. However, a recent drop in oil prices (which are now creeping up again) could be turning the tide a bit. In an investor update, United reported $544 million in hedging “losses” for the third quarter. It’s important to note, however, that hedging isn’t a matter of losing money – the goal of it is to take the risks of increasing prices off the table.
No word yet on recent results for Southwest, which hedged much higher in Q3 at 80% to United’s 44%. Southwest also is hedged at 80% at an average crude equivalent price of $58 per barrel for the fourth quarter 2008. There’s no doubt that fuel hedging has helped airlines cut costs, but it remains to be seen how well Southwest and other aggressive hedgers can boost their profits by predicting the unpredictable nature of oil prices.
