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Southwest comments on Stop Oil Speculation Now

October 1, 2008 by Evan Sparks

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.”

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Posted in Evan's News and Quick Takes | Tagged business, energy, southwest | 1 Comment

One Response

  1. on October 2, 2008 at 1:59 pm Robert Hasiak

    I dont think you have the right take on oil speculation and fuel hedging. I have great hatred for the airlines view of user fees, GA clogging the skies, and their push to own the skies with their boards. I hate the propaganda war they waged on GA so they could have their only tax paid into aviation trust fund stripped away. However…I think it might be shortsighted on your part or even out in open ignorance on your part to suggest that some how airlines are hipocrits for trying to stop oil speculation, when they are oil speculators. The fact is that the airlines are not oil speculators at all…they are fuel cost hedgers. There is a big difference between hedging to save on fuel costs, and speculating for a profit Oil speculators…raise prices…they are many…their frenzied rallies and the size of their group drive up prices. These people do not touch the fuel…ever..they sell the contract for profit…later on.
    the airlines HEDGE against rising fuel costs..by purchasing contracts to get oil at a set price…when the price of oil goes up…they pay the contract price..which translates into paying less for jetfuel…because they are not paying maket price for it…they are paying contract price. The oil speculation…is not fuel hedging..they are two different things done by two different groups of people..for two very different reasons…One group does it to MAKE money, the other group does it to SAVE money… I am not quite sure what level of understanding and comprehension you have on what hedging is…and what speculation is…but hopefully now you have a better understand of these two very separate issues…and why it is just wrong to suggest the airline industry as hipocracy for trying to stop oil speculation.

    companies that hedge fuel costs do not raise prices significantly…speculators in mass buying on world news….raise prices tremendously.



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