Airlines and hedging back in the news from AVIATION WEEK

The good people over at Aviation Week seemingly still don't quite get it. Hedging is not supposed to be a money making operation. It is supposed to eliminate (or at least lessen) one form of risk. In this case, those airlines that locked in the price of Jet Fuel need not worry about it. True they are paying more than the spot price, but that always happens. When they made their decision, prices could have gone to $200 and then they would be writing what a great move it was to hedge.

Airlines Made Bad Bets in Fuel Hedging | AVIATION WEEK:

"With oil prices rising to levels near $150 per barrel and then unexpectedly falling by more than 60%, airlines had plenty of opportunity to make wrong bets on fuel. And many did. Ryanair, for instance, locked in fuel prices during the run-up that now mean the carrier has to pay far more than the spot rate. Air France-KLM, too, has been hurt. At current oil prices, the carrier's hedge book means it will pay more than at spot rates for the rest of the financial year, as well as in the next two. The airline in the past quarter took a €373- million ($466-million) financial charge related to hedges.

Note to class, this is a time when the airlines REALLY wish they had purchased call options and not futures. Why? (yeah that will likely be a test question.)

An important point to ponder, given the apparent correlation of fuel prices and the economy really makes the fuel prices the best thing to be hedging (ie. what is the real exposure?).