View From a Height

Risk Management

On top of everything else, only JetBlue and Southwest will be profitable this quarter, because they're the only two airlines that managed to hedge a substantial part of their fuel costs.

The Denver Post covers this from the local - i.e., Frontier - angle, and includes this whopper: "Hedges come with risk, and good hedges require a solid balance sheet..."

True as far as it goes, which is basically far enough to back away from the gate, and not much further. Two hundred words isn't enough time to explain why an unhedged position isn't a risk-free position. But shouldn't the fact that the airlines who didn't hedge are getting killed on fuel costs kind of hint in that direction?

Look, you're running an operation that's wildly cyclical, in an industry that may not have shown a profit over its lifetime. Your major cost is the single most volatile commodity known to man, and it's completely beyond your control. Wouldn't you want to do something to protect yourself against that?

Hedging usually does require some up-front costs, but unless you're going to Vegas, selling uncovered calls or buying puts with borrowed money, proper hedging reduces risk.

Once again, it's the smaller, more imaginative airlines that were on top of this, hedging their risks, while the bigger boys apparently couldn't be bothered. Maybe there's a reason they're all in bankruptcy.