To Hedge or Not to Hedge?


#1

I was just reading an article about the struggles of the airline industry. One major advantage that Southwest has is of course its cheaper fuel which it has hedged. It has hedged 70% of its fuel this year at $51 a barrel. So one has to ask, do you hedge fuel in a market like this or not. One advantage is having fuel at lower price levels, but you have to look at it as an investmentl; it could go down, and some experts perdict fuel to keep going up while some think it will eventually drop. Another concern is the cash required to hedge that many carriers don’t have. So, what do you do?


#2

I would still lock down a small percentage of expected consumption during the next 5 years. I.E. 10 percent in 2009, 10, 11, 12 and 2013 then I would monitor the markets closely. On a day that oil dumps at least $4 a barrel I would add to the positions. The key is to do it gradually and systematically. It wouldn’t suprise me if Southwest does it on a “dollar-cost-averaging” type basis.