Fuel hedging is a standard practice for most airlines to protect against the high volatility of one of their most important costs. As prices soared in 2008, Southwest was hailed for saving $3.5 billion through prescient hedging.
But US Airways hasn’t hedged for two years, the only major airline to take the strategy, execs said at a Platts Conference. So far the strategy has paid off during a period of low volatility.
Refusal to hedge amounts to a bearish call on fuel, and US Airways is considering remaining unhedged going forward.
[Fuel director Michael Baer] questioned the idea that hedging is something that should always be pursued, noting that Southwest Airlines — which he did not mention by name, only in thinly-disguised references — was practically worshiped solely because of its hedging prowess during the runup in prices that peaked in mid-2008. Hedging is speculation, according to Baer; so is not hedging.
The company may switch away from that strategy, but Baer said a company that at its peak made only $427 million has to be careful about tying up too much cash in a hedging strategy. Options, in particular, can be expensive.
So does US Air know something we don’t know about fuel demand in 2011?