Wednesday 1 August 2012

Hedging your bets


Full article in JPG format

When Delta Air Lines announced its intention to acquire an oil refinery earlier this year, the unusual move drew a mixed response from analysts. Some praised its innovation, arguing that its daily consumption of 210,000 barrels of jet fuel justified cutting out the middle man. Others questioned whether airlines should be in the business of refining crude oil.

But one thing no one disputed was the urgent need to offset fuel price volatility. According to IATA's latest forecast, Brent crude, the main European benchmark, is likely to average $110 a barrel this year - but in just six months spot prices have ricocheted wildly between $128 and $88.

For airlines that rely on stable ticket pricing to deliver profitability, such swings have brought fuel hedging firmly back into vogue during the post-2008 recovery. In its simplest form, hedging allows fuel prices to be fixed or capped for future expenditure, smoothing out unforeseen spikes in the oil price and bringing some certainty to margins...