The Other Side of Fuel Hedging
 

....sometimes it doesn't always work in your favor....

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

WN has and is working -- and make no mistake, their hedges are *still* working in their favor.

Period.

Better than UA, who accounted for a $500MM write-off in their fuel hedges this quarter. Oopsie.

Lots more discussion on the hedging and whether it was a good idea or not at the time CO did it here. I'm actually surprised how minimal the damage was, considering that they bought at the top. Then again, there's always a chance that they will continue to take write-downs on the hedges in the coming quarters as they contineu to lose money on them.

Hedges are (generally) option or commodity contracts. Write-downs involved are because of mark-to-market accounting- the contract is worth more the higher the price of fuel is. Writing it down isn't a bad thing -you purchasing hedged fuel at the same price no matter the cost of oil- it just means the firm backing the options don't have to pay as much to make up the difference between the hedge price and the spot price.

The value of hedges really shouldn't be included on a balance sheet- it's a contract that provides a predictable fuel cost for the future and is therefore IMO a cost of doing business, not an investment.

People are now coming to understand that hedging is a two-sided deal. For everyone who wants protection against rising prices, someone wants protection against falling prices. Mexico, in particular, was active on the down-side protection as an oil producer.