Hedging Fuel Prices

Hedging fuel prices has become a matter of numerous debates and analysis, a question of whether airlines should hedge fuel prices to keep their incomes less volatile or whether they should not. A number of reasons stay behind both views, with pros and cons for both options. I believe there is no straight forward answer to this question, and a great many of factors should be taken into consideration when making a whether to hedge or not ( factors like historic prices during the year, the company size, the market the company operate in, etc.)

Why airlines should hedge the fuel prices

Hedging is a good way to level company’s variable costs. Fuel hedging allows creating a foundation for long term planning. A great many of various factors affect jet fuel prices, nevertheless, the main ones, that can cause substantial fuel price volatility are: economic conditions, currency values, crude and jet fuel inventories and market expectations. However by hedging the jet fuel prices, airlines can avoid being exposed to the financial risks caused by the above mentioned factors and thus can stabilize their incomes, costs and cash flow in the near future. Another reason is that hedging can become a source of competitive advantage for airlines in this very price-focused competitive industry. Yet another reason for airline to hedge is that it serves as an indicator of a savvy, cost focused and competent management. Finally, it is a way to protect share prices for publicly listed companies.

Why airlines should not hedge the jet fuel prices

While there are a number of advantages of hedging the fuel prices, some disadvantages also exist in regard to this approach. One of such disadvantage is that it is nearly impossible to know whether the prices will go up or down, and by locking the prices through collars, swaps, forward price contracts, or similar hedging instruments that are believed to protect