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The Dangers of Fuel Hedging: Continental’s Hedges Under Water

Whenever there’s a story about Southwest Airlines’ much-publicized fuel hedging strategy, there are lots of questions about why other airlines don’t do it.  The answer?  It can be risky.  The example?  This Houston Chronicle report notes that Continental’s most recent fuel hedges have a price floor of about $121 – around $8 higher than the current market price.  They have the option not to exercise those options, so it won’t be a concern, but it just shows that while Southwest’s strategy is obvious when it’s working, today’s volatile oil market shows why hedging, while wise, can also be quite risky.

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  1. The Chronicle is using some imprecise wording (collars vs. options) but if Contintental is using options, I wouldn’t characterize this as “risky”. The option to buy oil at 121 if the market price goes below that floor are worthless, but it is very possible they didn’t pay much for those options. IF continental is trading those options (as I suspect Southwest and Emirates may be doing ) then that is risky, but just purchasing them isn’t risky behavior.