nerdboytodd

Looks like Southwest took a bit of a loss due to it's fuel hedging. AS was number two behind Southwest with regards to the best hedged fuel. Should we expect that we'll see something similar in AS's next quarterly announcement...

http://news.yahoo.com/s/ap/20081016/...arns_southwest

Duckouttahere

As the prices were skyrocketing this summer, I began to wonder how high the cost of fuel would have to go before airlines folded their cards and said enough is enough. I don't know what that point is and it looks like we don't have to worry about it for the time being but I wonder if it was ever an option by Alaska to park their aircraft if the fuel got around $200/barrel?

I travel a lot for business and I know there is a point where our company or our clients will deem flying as not worth the cost. Airlines make a lot of money off business travelers and there has to be a point where it's just not worth hedging over a certain amount.

Hopefully Alaska didn't get hit that bad in it's fuel hedging.

COS flyer

The fuel hedge thing is pretty complicated. The accounting rules are even worse. Alaska is taking a huge hit to their mark to mark hedges and will post a huge loss on them. Basically they (and Southwest) are showing the difference in what they paid for unfilled contract to what they are worth today (but they will be worth something else when they come due). It's like looking at your stock portfolio. It goes up (or in todays world) it goes down, down again, down even more....but that's all electronic money until you "cash out." Southwest's fuel hedges and Alaska's probably truly saved their bacon this summer. But it may not look like it in the financials. There's a reason I am not a financial person.

Seat 7D

The airlines have been whining about oil speculators driving up the price of oil. I agree that it is a problem (and with some other commodities as well), but isn't a fuel hedge the same thing? Essentially, it's a gamble, an educated guess, or maybe a not so educated guess.

jwright

The difference is that airlines are actual consumers of the petroleum products for which they are purchasing futures contracts. Airlines hedge to try to eliminate some of the risk of fluctuating prices. To so-called speculators, oil is just another commodity that is traded. There is plenty of debate whether or not the actions of those "speculators" are really behind price run ups.

dgwright99

If buying homeoners insurance is "a gamble" then I guess an airline hedging it's fuel costs is as well.

I don't regard buying homeoeners insurance as being a gamble.

westcoastman

Paying a nominal homeowners insurance premium is far different than being on the wrong side of a oil hedge much like writing an uncovered stock option. My worst bonus ever as a securities trader was during the biggest bull market ever because the whole company had lost so much money on the hedge that was in place to protect against a bear market. AS' loses on the hedge are magnified and probably far far worse than if oil prices had risen and if they did not have a hedge. But who would have guessed that oil prices would fall so much...

Jalinth

I wouldn't really compare oil hedges by an airline to an uncovered stock option. Closer to a covered option - they've lost money on the hedge but get increased operating profits from the lower fuel prices. Major problem with oil hedges is they aren't a perfect fit for an airline - they'd want a hedge covering the cost of their fuel (Jet A/A-1) but instead only get one covering oil. So they are still at risk for change in the "crack" spread - which have also been moving around much more than normal so airlines have run into the problem of going negative mark to market yet not seeing the full savings reflected in their current fuel costs.

Whether or not oil hedges are a good idea is a question of how much does the hedge cost, the collateral you need to put behind it, can you access enough collateral for a margin call if it goes underwater, profit left after the hedged fuel is factored in, etc... It really is an airline by airline decision.

dgwright99

Yes - which is what makes it comparable with insurance.

Assuming that you hedge consistently, fluctuations in the crack spread should even out over time.

There's an interesting paper on the topic here http://www.kellogg.northwestern.edu/...s/jet_fuel.pdf