The grounding of Silverjet brings to mind a question George Anders asked the other day in the Wall Street Journal: why doesn't the airline industry do more to hedge its oil exposure? Without appropriate hedging, airlines are pretty much always speculating on the price of oil.
With oil near $130 a barrel, why does Southwest Airlines stand alone in the airline industry in its aggressive use of hedging to keep fuel costs under control? Southwest has locked in more than 70% of its jet-fuel requirements this year at a price equivalent to $51 a barrel for crude oil. By contrast, other big carriers have hedged 30% or less of their fuel needs this year. Those carriers generally expect to pay the equivalent of $85 to $100 per barrel of oil under their hedging programs.
Anders' column suggest the answer might be frequent management changes in the industry. With such regular turnover in the top ranks, the airlines just lack management experience to deal with price changes. Law professor Larry Ribstein has some even more complicated explanations, including the possibility that airline management are concerned about putting complex hedges into their disclosures for fear of triggering memories of Enron. Worse, management may run the risk of Sarbanes-Oxley legal liability if they inadequately disclose their hedges. Perhaps its safer not to hedge.
Why Rivals Don't Copy Southwest's Hedging [Wall Street Journal]
Posted by Anal_yst, May 30, 2008 12:33PM
This is nonsense. Back in school we did a simple study of the hedging programs of most major airlines. Now my memory is a bit hazy, but sarbox compliance (or other bs like that) is very unlikely to explain the lack of/poor hedging by every airline other than southwest.
Again, if memory serves, what it appeared was that management was not comfortable with even conservative hedging strategies like collars, and even more averse to more aggressive directionally-biased approaches.
There were at least a few situations where prior airlines had gotten burned by (poorly conceived/executed) hedges, further causing executives to shun such strategies, as the viewpoint is that its easier to explain away poor operating results due to rising input costs than it is to explain a major hit due to bad financial alchemy.