Newsstand - High fuel hedges may backfire on some airlines

NEW YORK, Sept 13 (Reuters) - A sharp drop in oil prices in recent weeks has been an unexpected boon to the recovering U.S. airline industry, but some airlines will not see the full benefit, having locked in prices nearer this summer's peak.

Continental Airlines (CAL.N: Quote, Profile, Research), American Airlines-parent AMR Corp. (AMR.N: Quote, Profile, Research) and UAL Corp. (UAUA.O: Quote, Profile, Research), the parent of United Airlines, have all hedged a portion of their third-quarter jet fuel needs above current prices, which could increase their costs.

The ineffective hedges reflect a haphazard approach by some airlines to protecting against fuel price spikes, reacting after the fact rather than incorporating hedging programs into their operations, experts said.

http://today.reuters.com/news/articleinvesting.aspx?view=CN&storyID=2006-09-13T201423Z_01_N13426701_RTRIDST_0_AIRLINES-FUEL-HEDGE.XML&rpc=66&type=qcna

So I must be a genius for paying my car insurance bill last year that covered an accident but an idiot for 20 years when paying insurance those years I had no accidents.

Hedging locks in a price to reduce exposure and variability. It has up and downside risk. Being on the downside doesn't mean it is wrong.

I obviously have no idea how hedging works, and I am curious to find out whether there is some time component (ie: how soon do those "locked in" fuel have to be delivered?). Perhaps the airlines can "delay" receiving those fuel until the prices bounce back up, unless it continues to slide.

LAX

By hedging, they've essentially pre-agreed on a price to pay for fuel to be delivered at a specified time in the future. They could, of course, resell these delivery options, but the price has likely gone down already.