As Oil Prices Climb Again, May Gamble To Recoup Losses

Airline execs who got too aggressive hedging fuel last July -- when oil was trading at $147 a barrel -- found themselves unable to reap the benefits when that price plummeted 75 percent in the last quarter of 2008.

The Wall Street Journal reports most large US domestic airlines paid out big bucks to escape their futures contracts. Even Southwest -- which has used hedging to great competitive advantage in the past -- got burned, and has now reduced its fuel hedges to near zero, according to CEO Gary Kelly.

But as oil bounces off the bottom and prepares to head back up, the WSJ reports carriers are moving toward contracts which allow backing out of the hedges and buying fuel at current market rates if oil prices fall again. Upfront costs of these derivatives are higher, but not as high as the write-downs airlines took getting out of previous contracts.

AirTran reported half its 2008 loss of $274 million was the fault of fuel hedging. By the end of the year, was back to hedging only 9 percent of its 2009 needs, but say's it's now back up to 35 percent.

After its experience last year, Southwest is also sitting largely unhedged, but spokeswoman Brandy King says the company is, "poised to move back into the hedging game at the appropriate time."

Cue Kenny Rogers' "The Gambler" here...

FMI: www.southwest.com, www.airtran.com