Oil closes in on $50 a barrel — is it time to hedge?

by Christopher Elliott on November 12, 2008

I’m no economist, but it seems to me that with the price of crude oil approaching $50 a barrel, this might be a good time for airlines and cruise lines to hedge their fuel purchases.
Not that anyone is paying attention to anything I’m saying. In an internal memo from US Airways to its employees, the airline admits it ended its hedging program a few months ago.

But hedging works. Southwest Airlines used it to remain profitable during the lean years following 9/11. Some of the cruise lines hedged their fuel, too, allowing them to make mad money when their competitors added fuel surcharges to their sailings.

So why aren’t more airlines hedging?

Because, simply put, it’s not in the nature of airline managers to think about the future. They would rather wait to see if the price of fuel goes below $40 — and even then, there’s no guarantee they’d buy contracts for fuel purchases.

If the travel industry doesn’t lock in a favorable price for fuel now, it deserves what comes next. And passengers shouldn’t be expected to pay for management’s mistakes.

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Tagged as: fuel, hedging, purchases

  • jlawrence01

    >>Because, simply put, it’s not in the nature of airline managers to think about the future. They would rather wait to see if the price of fuel goes below $40 — and even then, there’s no guarantee they’d buy contracts for fuel purchases.

    Most airlines don’t hedge because they do not have the available cash to invest in those instruments. Southwest has consistently been profitable and generating the cashflow necessary to lock in the price of their fuel. Most of the other airlines wereburning through all of their cash.

    Do realize that “hedging” guarantees a reasonable price for your commodity purchase, not necessarily the lowest price. My purchase contract to purchase steel in December 2008 at $800/ton looked good in August when the price was approaching $1100/ton but not so good as steel can be had for $700/ton.

  • Frank

    Arent Southwest’s hedges in the ballpark of $51 dollars? what’s next year’s? If oil goes down any more, Southwest will have hedged ABOVE market rates. A loss. Just who they gonna pass that mistake on to………………………..LOL.

  • jlawrence01

    >>Arent Southwest’s hedges in the ballpark of $51 dollars? what’s next year’s? If oil goes down any more, Southwest will have hedged ABOVE market rates. A loss. Just who they gonna pass that mistake on to<<

    So what? They can base their fares on a $51/ barrel oil price and not lose money on the deal. The other airlines were paying *who knows what* when their fares were based on $60-70/bbl oil.

  • Frank

    So what? They can base their fares on a $51/ barrel oil price and not lose money on the deal
    ========================================================

    They just did. They also have HIGHER labor costs now as well. They have some of the HIGHEST paid employees in the industry!

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