Saturday, May 02, 2009

Southwest Airlines and hedging from WSJ

Article -
"Southwest Airlines Corp. (LUV), the airline industry's most aggressive fuel hedger, remains committed to hedging to lock in future fuel prices, Laura Wright, chief financial officer, told Dow Jones Newswires.

Amid today's volatile oil prices, Southwest has placed new hedges this year using only call options. 'That's our favorite way to hedge,' she said, because it offers protection against rising prices, but allows the company to pay market rates if prices remain low.

'We used call options a lot in the late 1990s, but then they got too expensive' as oil prices rose, Wright said. 'In the last two years, we used a lot more collars,' which combine options contracts, providing protection from falling prices but less upside protection if prices rise. 'We've always used simple methods of hedging, a combination of options, collars and swaps,' she said."

Just this past week a group in my MBA class did a case on Southwest's hedging, so for all of you in class, this should be nothing but review!

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