Whether companies are hedging fuel, aluminum, coffee beans or Japanese yen, they generally need to have good credit and be in a position to pay some substantial upfront costs. That's been an obstacle for carriers that have had to limp through bankruptcy reorganization.
In early 2004, Delta Air Lines Inc. sold off its hedging contracts ahead of their scheduled settlement dates, in part because its credit rating had been downgraded. Earlier this year, it had to get a bankruptcy court's approval to begin hedging again. The same was true for Northwest Airlines Corp., which is also trying to emerge from bankruptcy.
Fuel hedging has saved Alaska Air more than $250 million in the last four years. Beginning in 2002, it began steadily increasing the amount of fuel it buys in advance, but in mid-2005, it backed off a bit.
It has just under half of its fuel hedged for 2006, and has to pay several dollars more per gallon than Southwest, which lined up its hedging contracts much earlier.
Alaska Air's hedging positions will decline over the next couple years - down to just 13 percent in 2008. But in July, the company said it would begin hedging again for the first time in several months, citing continued uncertainty about oil prices.
New York-based JetBlue, another big hedger in recent years, said in its latest quarterly earnings report it had about two-thirds of its fuel hedged for the first six months of the year, but expects its fuel costs to rise because it's hedging only 40 percent of its fuel needs for the remainder of the year.
Even though fuel hedging has gotten more expensive, Heimlich said he thinks airlines will do more of it in the future because it's proved to be a successful way to manage risk.
One potential downside to hedging is the possibility that a company will get stuck paying above-market prices.
In the decade before Sept. 11, 2001, for example, crude was trading under $20 a barrel globally, and jet fuel cost under 60 cents a gallon.
"If the airlines had been hedged then at 90 cents a gallon, guess what everybody would be writing about? 'Those idiots. I can't believe they're hedging. Fuel is so low. Why would they be so stupid to lock in such high prices?'
"You know what we would do to have 90 cents a gallon right now?" Heimlich said. "I mean, we would give a left and right arm for 90 cents a gallon."
Investors don't appear too worried about a possible financial hit from out-of-the-money fuel hedging contracts.
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