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Why Don't The Airlines Hedge More?

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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]