[Rhodes22-list] Energy Policy - Oops!

[ed kroposki]

Brad:
	Does this document mean that you are bucking for the 'head fellas'
Job?  I bet Michael understands this stuff.

Saroj:
	I sent that attachment in my reply to Bill and Rummy.  So much for
you reading all those important energy related articles. :-)

	The next hedge would be buy GE and Westinghouse stock since they
both are planning nuclear reactors.  The next ones will be on sites the
government already controls:  Savannah River and Oak Ridge.  Since the sites
already have facilities they will not have to deal with environmental
lawsuits.  Specifically, they will be for national defense and exempt from
hassle. 

Ed K
Greenville, SC, USA
Addendum:  Rummy is finding out what makes Greenville green and keeps him
working more than he wants to.  Ah, but it keeps him on top of everything.
:-)
 
	
-----Original Message-----
From: rhodes22-list-bounces at rhodes22.org
[mailto:rhodes22-list-bounces at rhodes22.org] On Behalf Of brad haslett
Sent: Monday, February 21, 2005 6:49 AM
To: rhodes22-list at rhodes22.org
Subject: [Rhodes22-list] Energy Policy - Oops!

Ed, forgot you couldn't attach MS Word documents. 
Here's a cut and paste version.  Brad

Passenger Airline Profitability in the Post 9/11
Environment - How Southwest has Controlled Fuel Costs
by Hedging and Why Other Airlines Should Hedge Fuel
Purchases

Brad Haslett
Managerial Finance BA-518 
Embry-Riddle Aeronautical University
Winter 2004

The Search for Profits Post 911

The US passenger airline industry was in trouble in
2001 prior to 9/11. A slowing economy and the bursting
dot-com bubble suggested substantially slowed economic
growth. With a softening economy and a recent round of
tough labor negotiations, most major airlines were
facing a bleak profit outlook. However, industry cash
reserves totaled $11 billion at the end of the first
quarter of 2001 and operating revenues had been
growing nearly 7 per cent annually since 1995.  The
9/11 terrorist attacks eliminated any hopes for a 2001
profit for all but a handful of carriers, and three
years later, only a rare few have achieved positive
financial results.  One key to the success of those
that have not only survived, but also prospered, is
keeping fuel costs under control. Every one-cent
increase in the cost of a gallon of jet fuel costs the
industry $180 million per year. This paper will
examine the history of airline fuel costs, what
techniques are available to control and predict jet
fuel prices, and what the most successful in the
industry, primarily Southwest Airlines, are doing to
control fuel costs and maintain profits by using fuel
hedging strategies. 

Oil is a commodity that has always had a volitale
price history, however, prior to 1973, the inflation
adjusted price tended to hover around $25 per barrel. 
The rise to power of the OPEC oil producing nations in
1973 changed the dynamics and the volitality of crude
oil prices. OPEC mandated cutbacks in production in
1973 and 1979 created substantial rises in worldwide
crude oil prices.  Airlines suffered substantially as
a result but the industry was still regulated in 1973
and de-regulation was in its infancy in 1979.  Crude
oil prices reached their highest point in nearly two
decades in 2004. The sudden rise in crude oil was due
to a complex set of factors including uncertainty
about the stability of production from the Middle
East, but few in the oil industry predicted it. 
Almost no US air carriers were financially prepared
for it. US based airlines were already suffering
heavily from the post 9/11 environment. The 2003
industry debt level stood at $100 billion while the
value of all the outstanding stock of passenger
airlines was only $3.2 billion. The sudden rise in oil
prices eliminated all hope for an industry profit for
the remainder of 2004 and perhaps for the next several
years for all but a few.  Those carriers that have
remained profitable, namely Southwest Airlines, have
done so largely because thay have controlled fuel
expense through a sophisticated system of hedging jet
fuel costs.  We will examine why Southwest has been so
successful and why the other competiters haven't
followed their example.

Most major air carriers have retired their older, less
fuel efficient jet fleets for aircraft that burn less
fuel. Today's jet fleet is nearly three times more
fuel-efficient than the fleet that was operating at
the time of the first OPEC fuel crisis. However, fleet
modernization requires major outlays in capital and
heavily affects profits when passenger traffic
declines.  Despite improving fuel requirements, jet
fuel expenses still account for 12 to 18 per cent of
operating costs, second only to labor expense.  Fuel
costs nearly doubled in 2004 and unlike other
industries, the airline industry was unable to pass
the expense to the consumer.  Cargo airlines such as
FedEx and UPS tacked on fuel surcharges to customer
invoices and consumers accepted the price increases
for services.  When Contential and United airlines
tried to add fuel surchages to ticket prices, airline
passengers sought other carriers without the
surcharges and both airlines quickly recinded the
charges.  The US passenger market remains extremely
price sensitive and fuel surchages of as little as $10
per ticket have led to mass defection of travelers to
other carriers.  Purchasing jet fuel at the lowest
cost has become one of the most important factors to
remaining competitive.

FUEL HEDGING AT SOUTHWEST VERSUS OTHER CARRIERS

SouthWest Airlines locked in 80% of their 2004 fuel
costs based on a $26 per barrel of crude oil while
other carriers paid as much as $55 per barrel on the
spot market.  Southwest has already hedged much of
their 2005 fuel costs at $32 per barrel and 45% of
their 2006 fuel deliveries at $28 per barrel.  United
and US Airways are prevented by law from hedging
because they are operating under bankruptcy court
supervision.  Delta had hedged nearly 40% of their
2004 fuel costs but were forced to sell their hedge
positions for $82 million because they were strapped
for cash.  This short- sighted strategy forced them to
buy fuel on the spot market.  Other carriers hedged
fuel costs to a much smaller degree than Southwest but
were unprepared when oil prices peaked in mid-year
2004.  While hedging has proven extremely successful
for Southwest, it is not without its risks.  Hedging
requires substantial up-front cash and few airlines
have sufficient cash post 9/11 to take hedge
positions.  Most of the surviving legacy carriers have
needed all available cash to avoid bankruptcy.  By not
hedging, airlines are taking on the risk of rising
commodity prices into their business model.  This
would be acceptable if no airlines hedged.  But when
carriers such as Southwest are successful at keeping
fuel costs (at times nearly half of their competiters)
so much lower than their rivals, other competiters
must match fares and absorb the rising fuel expense. 
Were crude oil prices to fall in the $20 per barrel
range, Southwest would be at a decided disadvantage. 
Few in the oil industry or the airline industry expect
oil prices to retreat to that range in the near
future.  It's not that Southwest was better than
rivals at predicting where fuel prices were headed. 
Instead, with its rock-solid credit rating and strong
cash position, it could afford to buy hedges in the
past few years when the financially ailing carriers
couldn't.  With their weak credit ratings, they faced
not only higher costs but demands for cash collateral
in some cases.  The weak position of rival airlines
was summed up by Continential Airlines CEO Gordon
Bethune, "you can't get enough money to buy hedges,
and you can't find anybody dumb enough to get on the
other side of it".  American Airlines CEO Gerard Arpy
stated much the same sentiment, "we couldn't enter
into swaps, which were our traditional mechanism for
hedging fuel, so as a consequence, we're not as hedged
as we've been historically, its's frustrating".  Fuel
costs will be the deciding factor for many airlines in
2005 as to whether they can postpone bankruptcy.

Southwest uses a combination of hedging instruments,
including call options, collars, and fixed-rate swaps.
 Some are more expensive than others but less risky,
while others give the airline a bigger advantage if
oil prices fall.  These instruments work in different
ways, but Southwest essentially pays for the right to
lock in fuel at a particular price or price range in a
future period.

OTHER ADVANTAGES OF HEDGING

The financial results of the US Airline industry for
2004 and the positive gains achieved by Southwest
Airlines aggressive fuel hedging strategy have
demonstrated the benefits of hedging. Those airlines
that have chosen a non-hedging strategy because of
bankruptcy or policy have paid dearly.  John Armbrust,
a jet fuel contract consultant, talking about the
majority of the airline industry, other than Southwest
and JetBlue, states "don't underestimate the ability
of the airlines to walk off a cliff together.  Almost
all of them are pretty vulnerable right now".  This
herd mentality exists primarily among the legacy
carriers.  The low-cost carriers such as Southwest
have departed from this line of thinking, and by doing
so have achieved financial success while the rest of
the industry is on the verge of bankruptcy. But other
financial issues facing airlines benefit from hedging
as well.  There are two major ways in which hedging
can assist in an airlines ability to invest.  First,
new aircraft purchases must be planned years in
advance, and purchase orders submitted to the aircraft
manufacturer.  Hedging preserves internal cash flow to
meet future commitments to purchase aircraft.  Second,
during periods of economic downturn, weak airlines
often have to sell assets to survive.  Financially
stronger airlines may be in a position to buy these
assets at prices below fair market value.  If hedging
improves a carriers cash position during economic
downturns, the hedged airline may rely less on
external sources of funds to make capital
expenditures.  External finance is increasingly
expensive when the hedgeable risk factor (jet fuel)
negatively affects cash flow.  By hedging its fuel
costs, Southwest has been able to meet financial
objectives and has taken advantage of its superior
cash position to buy gates from other financially
troubled airlines.  Even though hedging requires
substantial up-front cash, Southwest can predict its
budgetary needs and avoid unexpected rises in
operating costs that have forced others into
bankruptcy and "fire sales" of assets.  High jet fuel
prices coincide with low industry cash flows, and
industry investment is directly related to the level
of jet fuel cost.  Studies have shown investors are
willing to pay a "hedging premium" for companies that
reduce their exposure to commodity risk.  The hedging
premium can be attributed to the benefits an airline
reaps by generating more consistent, stable cash
flows.  Hedging airlines are able to better predict
future cash flows, and earnings, and make investments
during the high stages of the price cycle, both of
which are positively valued by investors.  Investors
in general do not trust airlines' earnings consistency
and heavily discount the sector's stock.  Airline P/E
ratios are generally half or a third of the market
average, a fact often lamented by airline CEO's.  By
hedging jet fuel purchases, airlines are better able
to predict future expensed and earnings, which would
help increase the confidence of financial markets.

HEDGING STRATEGIES AVAILABLE

A properly designed hedging strategy should optimize
the use of an airlines' capital and minimize the
volatility of earnings.  Hedging may occasionally lose
money, but the carrier as a whole benefits. 
Well-designed hedging programs secure or limits the
loss on key financial ratios by allowing the carrier
to spend capital on core activities.  One of the
reasons hedging activities have historically come
under so much scrutiny is that all hedging
transactions have a "loser".  Warren Buffet described
derivitive contracts (related to hedging strategies)
as "weapons of financial mass destruction".  If
airlines entered into hedging contracts solely as
speculative investments, Mr. Buffet's observation
would perhaps be correct.  But airlines must purchase
vast quantities of fuel to operate and hedging allows
them to smooth out expenditures, keep costs within a
certain range, and avoid suffering from sudden and
swift rises in operating expenses.  Derivitave
contract operations are a very specialized field and
most airlines that utilize hedging operations use a
combination of internal employees and outside
consulting firms.  Southwest for example, has three
full time fuel risk management employees who handle
fuel risk operations.  

There is no specific market that trades in jet fuel
hedging contracts so airlines use contracts in
existing markets for products that are closely related
in kind or whose price is closely correlated to jet
fuel prices.  Crude oil is actively traded on several
markets with the New York Merchantile Exchange (NYMEX)
being the most active.  Jet fuel is a direct product
of crude oil but does not precisely follow the price
trends in crude.  Home heating oil is very simular to
jet fuel and is actively traded on several markets
including futures markets.  Additionally, home heating
oil demand is seasonal and competes with jet fuel
refining capacity so it correlates well with jet fuel
spot market prices.  Successful jet fuel hedging
operations spread risk over different time frames and
several crude oil related product markets.  Some
contracts extend as far as eight years in advance but
the bulk of hedging operations are for contracts of
one year or less.  Generally, the farther in advance
an airline hedges the more expensive the up-front
costs while shorter range hedging, though cheaper,
exposes fuel expenditures to more risk.  Successful
strategies use a variety of products over a variable
time frame.  Derivatives are traded directly between
airlines and investment banks and are usually traded
with several different banks and investment firms to
diversify risks and to get the best pricing.

Hedging instruments are either over-the-counter (OTC)
products or exchange-traded futures.  The most
commonly used hedges in the airline industry are are
OTC swaps, collars, futures and forward contracts. 
Collectively these are known as symmetric hedges. 
While reducing earnings volatility by eliminating the
exposure to downside risks, they give away all or part
of the carriers participation in the upside (falling
oil prices).  A symmetric hedge is nothing more than a
portfolio of an option purchased (a long position) and
an option sold (a short position).  The long-option
position insures the operator against the downside,
but the short-option position gives away the upside
participation.  The premium from the short-option
position finances the creation of a long-option
position.

 Swaps, also known as Contracts-for-Differences
(CFD's) are used to lock in a fixed price for a
predetermined but not necessairly constant quantity. 
The first airline swap contract was traded in 1986
when Chase Manhattan Bank acted as counterparty to
Cathay Pacific Airways and Kock Industries in an
oil-indexed price swap.  Swaps are further delineated
into vanilla swaps, variable volume swaps,
differential swaps, margin or crack swaps,
participation swaps, double-up swaps, and extendable
swaps.   The vanilla swap is an agreement in which the
counterparties exchange a floating energy price for a
fixed energy price, that is, one party pays a fixed
price and recieves the floating price either by
receiving the cash value of the spot energy or the
spot energy itself.  The other party, the swap
provider recieves the fixed prices and either supplies
the spot energy or its cash equivilent.  The contract
defines the fixed volume or quantity over a specified
period of time.  The variable volume swap contract is
identical to a vanilla swap except that the quantity
is not known in advance.  A differential swap is
simular to a vanilla swap except that the
counterparties exchange the difference between two
different floating prices for a fixed price
differential.  The crack spread or margin is the price
differenetial between crude oil and jet fuel.  Because
jet fuel competes with other refined products, crack
spread swaps can protect against rising fuel costs due
to refinery capacity swings.  Participation swaps are
simular to vanilla swaps except the airline may
participate in a certain percentage of the savings if
prices fall.  Double-up swaps allow the airline to get
a better swap price but the provider has the option of
doubling the volume of product delivered.  Extendable
swaps are simular to double-up swaps except the swap
provider has the option to extend the period of the
swap for a predetermined period.

Caps, floors, and collars are also CFD's used in
hedging.  Caps provide price protection for the buyer
above a predetermined level, the cap price, for a
specified period of time.  A floor guarantees the
minimum price that will be paid or received at a
predetermined level.  A collar is a combination of a
long position in a cap and a short position in a
floor.  Caps, floors and collars are for predetermined
quantities and are usually settled at regular
intervals over the period of the contract.

Exchang-traded futures are also use by airlines to
hedge fuel costs.  Jet fuel futures contracts do not
exist in the United States, so futures on crude or
heating oil is used instead to hedge jet fuel purches.
 Because these futures contracts are based on an
underlying commodity other than jet fuel, they
introduce basis risk because they are not perfectly
correlated.  Basis is generally defined as:
     Basis = spot price of hedged item - futures of
selected contract.
Basis risk is a result of the relationship between the
spot price and futures price not remaining constant
throughout the life of the hedge, thus generating
ineffectiveness.  At the onset of the hedging
relationship, the optimal hedge ratio will take into
account the current basis, as well as the difference
in volatilities of and the correlation between the
spot commodity and the futures contract.  In the case
of the airline industry, they are always short jet
fuel and must go long futures.  

To implement a dynamic hedging strategy, an airline
needs to vary the hedging products over the oil price
cycle.  When oil is at the low point in the cycle,
receive-fixed swaps are used because the likelihood of
further price declines is not considered as probable
as price increases, and the swap contract allows the
airline to lock in the relatively low price.  In the
mid-range of the cycle, collars are used to lock in a
specified range of prices, giving up potential savings
from price depreciation while hedging against further
increases.  When oil prices are at the top of the
price cycle, caps are used to prevent losses from
further appreaciation while allowing the company to
take advantage of price decreases.  This sophisticated
strategy requires a substantial amount of monitoring,
but it has been rather successful for Southwest
Airlines: their fuel costs are currently locked in at
prices well below their competition.  Southwest
prefers OTC derivatives to exchange traded futures
because they are more customizable.  The ability to
customize these contracts greatly facilitates the
implementation of a dynamic hedging strategy.  This
strategy is based on the presumption that the oil
price cycle is a mean-reverting process, or that it
moves in cycles rather than consistently in one
direction.  Given this characteristic, it is possible
to implement a hedging strategy that enables airlines
to lock in prices at the low point in the cycle while
capping prices at the high end to take advantage of
eventual price declines.  To implement a dynamic
hedging strategy, a firm needs to vary the products
over the oil price cycle.  When oil is at the low
point in the cycle, receive-fixed swaps are used
because the likelihood of further price declines is
not considered as probable as price increases, and the
swap contract allows the airline to lock in the
relatively low price.  In the mid-range of the cycle,
collars are used to lock in a specified range of
prices, giving up potential savings from price
depreciation while hedging against further increases. 
When oil prices are at the top of the price cycle,
caps are used to prevent losses from further
appreciation while allowing the company to take
advantage of price decreases.  

ACCOUNTING ISSUES ASSOCIATED WITH HEDGING
Accounting for jet fuel hedges is an important issue
for airline managers because poorly structured hedging
strategies can adversely affect earnings statements. 
Some airline CEO's and managers are reluctant to enter
into hedging agreements that they don't completely
understand and accounting rules can sometimes make
losses on hedging appear as a management failure when
if fact, hedging makes sense for the airline.  It is
essential that trades are structured and tested in a
way that will enable the firm to receive the
preferable accounting treatment, otherwise earnings
volatility will be increased rather than decreased. 
Trading desks play a crucial role in ensuring that
both the internal and external accountants have the
information they need, so an intimate knowledge of the
relevant accounting standards is necessary by all
parties involved.
Jet fuel consumers are short jet fuel and must
purchase the commodity in the future as it is needed
for consumption.  This type of hedging strategy is
defined as a "cash flow hedge of a forcasted
transaction" by the Statement of Financial Accounting
Standards Number 133.  The accounting guidance for
such a transaction specifies that the derivative must
be marked-to-market on the balance sheet.  The
offsetting journal entry, however, is not booked to
earnings but rather to Other Comprehensive Income
(OCI).  Entries to the OCI account are booked directly
to Retained Earnings, bypassing the income statement. 
Then, when the forcasted transaction impacts the
income statement, the amounts booked to OCI are
"released" to the income statement, offsetting the
earnings fluctuations from the price of jet fuel.  The
net result is that the derivatives are carried at the
market value on the balance sheet, but there is no
volatility introduced to the income statement.

The accounting rules have an important implication for
hedging strategy.  If, for example, an airline
forcasts that it will burn 100,000 gallons of jet fuel
in a given month, hedges 100% of this usage, and then
uses only 80,000 gallons, the portion of the
derivative hedging the other 20,000 forcasted gallons
must be released from OCI to the income statement
immediately upon the determination that it is no
longer probabable that the full 100,000 gallons will
be used.  This will increase income statement
volatility and also call into question the company's
ability to forcast.  If the company repeatedly
demonstrates an inability to forcast their usage and
thus overhedges, that may be precluded from using cash
flow hedging strategies in the future.  Therefore, it
is a common practice for firms to hedge up to the
level they are certain to use, and remain unhedged for
any additional consumption.

OIL COMPANY HEDGING OPERATIONS
Airlines are naturally short on fuel while oil
production companies are naturally long on crude oil. 
It is useful to monitor oil company hedging operations
as a predictor of the direction oil prices are
heading.  The largest companies in the oil industry do
not hedge because they have several large projects
spread over numerous time frames and simply choose to
ride out the price cycle.  Smaller companies with less
diverse production and less vertical integration often
hedge their production to smooth out earnings swings. 
The latest run-up in crude oil prices was not as
lucrative for some mid-level producers as one would
think because many companies hedged their production
at price levels far below the eventual high mark of
$55 per barrel. This should encourage airlines in the
short run because oil producers do not think the
current prices will remain at their present level. 
The longer-term forcast is not as comforting. Oil
price forcasting is a tricky and often an elusive
pursuit, however, observing how oil companies have
responded to the most recent upturn in prices should
give airline managers some insight to how the
suppliers of the second most expensive input to
airline operations think the market will behave. 
While oil companies are currently enjoying substantial
profits from the rise in crude oil prices, few have
stepped up discovery budgets far beyond what was
previously budgeted.  This would indicate that they
think the current situation is temporary and prices
will return to "normal" in the near future. The bulk
of both large and small production companies have used
the excess cash from earnings associated with high oil
prices to pay down debt, buy back stock, and reward
shareholders with increased dividends rather than step
up exploration.  While this should encourage airline
managers that fuel prices are falling, the longer-
term outlook in the oil industry should be cause for
alarm.

The concept of  "peak oil", that is the eventual high
point of worldwide oil production, has been discussed
since Colonial Drake's first oil well.  A Shell Oil
geologist and later professor emeritis of geology at
Princeton University, L. King Hubbert, wrote a
scientific paper in 1956 which was derided by his
employer and peers and became known as "Hubberts
Peak".  Hubbert theorized that oil production lags oil
discovery by roughly forty years.  Since discovery
peaked in the US in the thirties, he predicted that
production would peak in the early 1970's. US domestic
oil production did in fact peak in 1970.  His later
prediction was that since world oil discovery peaked
in the sixties, world oil production would peak
shortly after the turn of the century.  While it is
still too early to tell with certainty, there is much
evidence to indicate that his second prediction is
eerily accurate as well.  As production peaks, crude
oil prices will rise with a constant demand.  With the
rapid modernization of China, and to a lesser degree
India, world oil demand is rising rapidly at the same
time production capacity is falling.  The history of
oil prices has been one of a fairly stable trend line
with wild but short lived swings away from the mean. 
If Hubbert's Peak prediction holds true, we may see a
shift away from the fundamental futures forcasting
models and a substantial rise in the baseline price
range for crude oil.  This should give pause to
airline executives and further encourage them to adopt
hedging operations to smooth fuel cost fluctuations
and earnings swings.  A majority of oil industry
analysts believe that there is a fundamental paradigm
shift in oil price trends.  Where in the past,
volatility was due primarily to geo-politics; future
price swings will be more a function of geology.  This
new paradigm can be seen by looking at the reserve
life index (RLI) of global oil reserves, a
simple-to-calculate metric: total reserves divided by
total production.  Simply put, the higher the RLI, the
greater the oil market's long-term growth potential. 
The current situation does not look encouraging.  In
the past 30 years, RLI has dropped from 119 years in
1970 to 47 years in 2004.  This trend is not reversing
but in fact seems to be accelerating with some
estimates that RLI will only be 20 years by 2020. 
This has a very ominous meaning for airline
executives.  Where in the past oil prices have been
determined by short-term political and economic
factors, future prices will be a result of market
recognition of the structural imbalance between demand
and supply.  Detractors from this theory will point to
"un-discovered" oil fields as the weakness in the
Hubbert's Peak argument but the oil industry's
reluctance to substantially increase discovery efforts
during a period of high oil prices should give little
comfort.  Most of the large and medium sized oil
companies have chosen growth through merger and
acquisition rather than the drill bit.  

The rising world demand for crude oil with a flat or
declining supply of the raw product will have serious
impacts across a broad spectrum of industries but
perhaps none more so than airlines.  While many
industries can switch to other sources of energy and
raw materials, there is no substitute for crude oil
derived jet fuel and no alternative fuels are expected
for decades.  Prudent airline managers would be wise
to closely follow investment and performance of oil
companies to guage what direction long-term jet fuel
prices are heading.  While no amount of hedging will
stop this long term trend, the volitility of oil
prices will most likely increase with more aggressive
market speculation by traders as the spector of
increasing demand along with falling supply develops.

CONCLUSIONS

The small number of airlines that produced stable
earnings in 2004, including Southwest Airline,
aggressively hedged their fuel budget.  Those airlines
that chose to "ride the market" for fuel or were
prevented from hedging by weak cash positions or
bankruptcy saw their potential for profit decimated by
the sudden run-up in crude oil prices.  Unless
passenger airlines are able to pass fuel cost
increases on to consumers, something no airline has
been successful at to date, smoothing fuel price
fluctuations through hedging would appear to be the
industry "best practice".  Making the case against
hedging, one foreign airline CEO, Rod Eddington, the
CEO of British Airways, commented: "a lot is said
about hedging strategy, most of it is well wide of the
mark.  I don't think any sensible airline believes
that by hedging it saves on its fuel bills.  You just
flatten out the bumps and remove the spikes.  When you
hedge all you do is bet against the experts of the oil
market and pay the middle man, so you can't save
yourself any money long term.  You can run from high
fuel prices briefly through hedging but you can't run
for very long".  Perhaps so, but the "bumps and
spikes" of the 2004 crude oil market has nearly ruined
several air carriers in the United States. The point
that Eddington misses and the bulk of the US based
legacy carriers missed in 2004, is this: hedging may
not save money, in fact it may cost money, but it
allows you to stay on budget and avoid suprises. At
least two may face liquidation in 2005.  Investor's
have shown a preference and are willing to pay a
premium to purchase shares in airlines and other
industries that protect earnings through hedging.
Airline executives testified before members of the US
Congressional House Transportation and Infrasturcture
subcommittee in June 2004, outlining the airline
industry's struggle for survival and pleaded for more
government bailouts.  They were flatly denied any help
and were heavily critisized by subcomittee members for
their handling of fuel costs and the failure to hedge.
It does not appear than any more government help is
forthcoming. Those airlines that chose not to hedge
have paid a terrible price and some may not survive
because of their error in judgement.







References
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"Airlines in Crisis: The Perfect Economic Storm",
www.airlines.org

Air Transport Association of America, Inc., May 20,
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Carter, Rogers, and Simkins, 2002, "Does Fuel Hedging
Make Economic Sense? The Case of the US Airline
Industry, Oklahoma State University

DeMarzo, P. and D. Duffie. 1995 Corporate incentives
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Ernst & Young, LLP, December, 2001; Financial
Reporting Developments: Accounting for Derivative
Instruments and Hedging Activities

Financial Accounting Standards Board. 1998. Statement
of Financial Accounting Standards No. 133, Accounting
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Gecy, C., B. Minton, and C. Schrand. 1997 Why firms
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Haigh, Michael S., and Matthew T. Holt, "Crack Spread
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