Fuel hedging - popular with many airlines?

[Captain]

I read an article the other day about BMI. The article mentioned that BMI's fuel is hedged (To hedge is to make a combination of bets such that if one bet loses another win). In other words: if the price of oil increases further they will not pay anymore than the price agreed at the time but could lose out if the price does fall.

Is this common practice for other airlines in the airline industry?

If they negotiate a reasonable deal, why do so many airlines charge for extra "fuel costs"?

Captain

[B744skipper]

Is this common practice for other airlines in the airline industry?

Yes it is, fuel hedging is a reason why Soutwest Airlines has been doing so well lately, despite the sky-high fuel-prices. And I know that Martinair also has been hedging fuel, but I'm not sure if they still do it. But airlines do need a lot of cash to hedge fuel, so I'm not sure if all the big players are in the hedging business.

You may hear that an airline is "80% hedged". This means that 80% of the airline's fuel is bought at a fixed price, and 20% would be bought at the market price. Because only 20% is at market level, the fluctuations are eased on the bottom line of the airline's fuel bill. This is good becuase the airline may lower its fuel needs - by up to 20% - and still get the fixed price. I believe they are obligated to pay that price if the needs dipped below the 80% level.

Since airlines normally do this if they're expecting the price to rise, and with the current oil-prices it may not come as a surprise that it is a common practice with airlines, but don't ask me which airlines are doing the hedging.

[Advisor]

Anybody

Where can one find a list of airlines that hedge their fuel

[Bowlie]

... but don't forget that these contracts are signed at 'current prices'. i.e. an airline entering into a contract today would likely be agreeing to (+/-) $67 a barrel prices. They would be betting that the price will continue to rise and they would benefit for the length of the contract. Now, if the price drops to $50 pbl ...

Of course all contracts are for fixed terms and will expire. The price advantage of Southwest will end.

[Bowlie]

Anybody

Where can one find a list of airlines that hedge their fuel

Advisor - I don't think you would find a list of this nature. Most airlines, who can afford it, likely hedge their fuel but to varying extent. One (possible) source would be to check airlines financial or annual reports.

[sn26567]

Virgin Atlantic and Virgin Express have hedged their fuel purchases. But apparently Virgin Blue forgot to do so.

[Bowlie]

But apparently Virgin Blue forgot to do so.

It's not quite that simple. As the AU$ has been appreciating significantly against the US$ a fuel hedge would have locked in old/higher exchange rates. For them the gamble was more complicated - in hindsight they probably should have but, as we know, hindsight is the best sight.

[Alistairbastian]

Fuel hedging has been one of the factors that has helped Southwest to excel !! Southwest has hedged abt 80 Been reading abt hedging and there are many types of hedging !!!
the below link has that info !!

http://www.kellogg.northwestern.edu/res ... t_fuel.pdf

Dear Advisor !!!
This pdf also contains the list of airlines that hedged their fuel but alas the pdf was created in 2002

N if u guys has noticed that most of the fuel info has been provided by Respected Advisor hmmmm my guess he working with a fueling company
Dear Sir pls shed some light on this issue !!!!

[Alistairbastian]

Does Hedging make economic sense


Does Fuel Hedging Make Economic Sense? The Case of the US Airline Industry
http://papers.ssrn.com/sol3/papers.cfm? ... _id=325402

Fuel Hedging in the Airline Industry: The Case of Southwest Airlines
http://papers.ssrn.com/sol3/papers.cfm? ... _id=578663

[Advisor]

Dear Advisor !!!
This pdf also contains the list of airlines that hedged their fuel but alas the pdf was created in 2002

I remain grateful to you for sharing the same with me. In that year i was associated with FUEL EXTRANET POLICY MAKING and am well aware of this list.

And on your latter suspicion, let us keep wondering if i work for a living or is it the passion of aviation that fuels my information drive

[Desert Rat]

I read somewhere that Southwest lost money for the first time in 17 years as the fuel price went down, and they had to write down some of their fuel-hedging contracts that were not interresting anymore...Times are changing...

[sn26567]

I read somewhere that Ryanair had been hedging fuel at a very high price, more than 100 $/bbl, for the rest of 2008 and early 2009, when the market price has fallen below 60 $/bbl. They are now paying the price of that policy when in the past they could benefit from it, when fuel prices were only going one way: up.

[Desert Rat]

It was probably the same article....

[Desert Rat]

Air Mauritius is facing difficulties as well, as they made some fuel hedging contract this summer at 105$...and with the barrel now under 40$...

[tolipanebas]

LOT said it has hedged at 140 dollars till 2010 and because of that, they are now on the edge of bankruptcy and are seeking help from the Polish government.

[bxleu]

Look at Cathay:
'Cathay faces $1bn fuel deal loss': http://news.bbc.co.uk/2/hi/business/7817243.stm