DALLAS — During the summer, the Air Transport Association and its member airlines launched a campaign to “Stop Oil Speculation Now.” I (and the rest of the aviation blogosphere) commented on it, arguing that limiting “speculation” on oil futures wouldn’t bring down the price of oil. Mark Ashley added that he was surprised about the campaign: “One surprise: Southwest signed the letter. By the logic of the letter, Southwest is one of the ‘speculators,’ and in fact it’s a major reason Southwest has been eating everyone else’s lunch. Yet they signed the letter decrying their own business practices. Huh.”
Southwest has, as is commonly known, aggressively hedged its fuel costs. According to Laura Wright, Southwest’s CFO, hedging is part of Southwest’s conservative financial strategy, controlling fluctuation in costs. She said that Southwest is 80 percent hedged in the third and fourth quarters, and 86 percent of its hedges are backed up by cash collateral and thus minimally exposed to counterparty risk.
I caught up with Wright to ask about the apparent inconsistency with calling for an end to “oil speculation” and engaging in risk-management practices that involve speculation about the future price of oil (i.e., hedging). Isn’t hedging the same sort of financial operation as speculation on oil futures? Wright said that the ATA’s proposal to stop oil speculation is aimed at “players [in the market] that aren’t end users” of oil products.
Wright said that Southwest doesn’t hedge for financial gain as much as it does for financial stability. The fact that Southwest is paying as little as $51 per barrel is a financial benefit not to be sneezed at, but its benefit is primarily in terms of being able to predict what costs will be and being insulated from fast-moving fluctuations in the price of jet fuel. Hedging permits Southwest to “have costs predictable within a range.”