Airline CEOs: Time to Hedge Your Fuel Costs

We have seen crude oil prices fall 50% from $150 to $75 per barrel. Aside from Southwest Airlines (LUV), my preferred air carrier for many years (for traveling, not investing), the other airlines missed the boat on hedging fuel costs and paid the price as the oil spike wiped away their profits after the last round of bankruptcies. If they were smart, they would begin hedging right now. Given the economic problems we are facing and the fear of a global economic recession, oil is on sale due to temporary factors and global demand is still growing (more on this in coming days).

Sure,oil could get even cheaper in 2009 as the economy weakens, but that would be the time to increase the hedges further as prices fall. Once the economy rebounds we will see $100 oil again and those who hedged will look very smart. Legacy carrier CEOs might not be used to being called smart, but they certainly should give it a try.

If any airline workers are reading this, pass along this advice to your bosses. Airline CEOs: start hedging your fuel costs now and increase them should oil prices continue to fall during the recession. Global oil demand is not going to start falling anytime soon, and falling gas prices today are just going to reaccelerate the demand growth that has fueled the commodity bull market.

Full Disclosure: No position in Southwest Airlines stock at the time of writing, but positions may change at any time. I do, however, have a Southwest Visa card in my wallet.

Comments

[rlf6953:]

Gee, you think? Where do we get such brilliant minds.

2008 Oct 22 10:09 AM

[igggy:]

Looks like everyone thinks oil is going higher. Eventually, yes. Next year - not so sure. Perhaps, we'll see $30-40 oil again.
Long HA (short term)

2008 Oct 22 03:06 PM

[Joshua Lacey:]

OPEC just cut production by another million barrels a day. We need to get a clue and invest in becoming energy independent. Jeff Wilson has a new book out I just read called The Manhattan Project of 2009. I got it on Amazon.com. He has a web site as well. I wish our country would wake up and smell the coffee and stop putting our country and economy in peril by being dependent on foreign oil.

2008 Oct 22 06:37 PM

[BAWE:]

Surely you jest.
Airline execs don't ever want to hear about hedges again as they suffer the embarassment of writing down the value of hedges taken earlier this year. The magnitude of these losses, even for Southwest, are huge.

2008 Oct 22 09:45 PM