Hedging fuel costs - How the flyboys did it

Long ago, in the time after 9/11/01 and before the invasion of Iraq 3/19/03, fuel prices were still pretty stable. A few airlines, Southwest being the biggest, decided to buy longer term contracts for jet fuel (2 – 3 years) in advance. This is called "hedging". And then the prices increases came. Most of the other airlines were buying short term at spot prices. Southwest was paying around $30 a barrel (actually as low as $24 a barrel) of jet fuel when the other airlines were paying $60 a barrel and above. The savings to the airline were significant, approaching a billion dollars in 2005. With the money they saved in fuel, they could invest in more aircraft, more training, growing their operation, not cutting the salaries of their employees. Of course, now that petroleum prices have been so high for so long, the benefits of hedging have started to shrink . . .unless there is – God forbid – an event that drives petroleum prices above $78 a barrel. But that won't happen, or will it?

Most individual vehicle owners don't have the economic clout or the facilities to hedge ground vehicle fuel - there are a few lucky ones (if you think cheap gas is a good thing). Some trucking fleets, however,
can do so. As Aviation Week says, "Hedging takes cash as well as skill and luck." For instance, I would have kicked myself if I had hedged at $2.50 a gallon in February when unleaded regular dropped to $1.99 here in NJ. Of course, gasoline is just about $3 a gallon here today just three months later.

[Source: Aviation Week and Space Technology]

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