Hedging Opportunity for Airlines?

In a recent interview aboard a Virgin Airlines aircraft, CEO David Cush spoke of a unique opportunity to hedge fuel prices. The airline was founded last year and currently has a fleet of 28 planes. The one year old airline recently moved their profit targets back a year to 2011 in light of the current economic crisis. Hedging fuel costs now could save the company cash and have it continue running for at least the next 4-5 years. The airline currently has enough funds to last 3 years without hedging. Cush says he plans on taking long positions 4 years out to lock in the fuel prices of today's markets.

The recent credit crisis could dampen the possibility of this idea, however. Reports out of Europe have many European airlines not seeking new hedging arrangement even with the price of oil down to $55/barrel because of the rising costs and risks. The failure of Lehman Brothers puts into question the viability of such deals. Its much harder and more expensive simply because its difficult to find a counterparty in a deal with a market so illiquid. Lufthansa, for example, is hedging down from 85% to 72% of its fuel bill in 2008 and is at 57% for 2009. The failure of Lehman saw the loss of many contracts and contributed to these decreases. The decisions will remain with the airlines. Irish airline, Ryanair, has followed a strategy of not hedging its fuel prices and suffered for it over the summer. They decided to enter the hedging market at triple digit prices and have now decided to switch back to their old strategy. It seems airlines are not finding it easy to get new deals. The deals appear to be out there, however, as some airlines are continueing their hedging strategies even with prices at $55 such as French airline Air France-KLM. Aggressivly seeking counterparty's willing to take a position would be the best opportunity for airlines dedicated to a hedging strategy.

http://www.iht.com/articles/2008/11/13/business/air.php