To Hedge, Or Not To Hedge?

That Is The Question.

What is hedging? It’s a financial instrument to buy something in the future at a given price. In this case, we are talking about fuel cost. Why would you want to purchase fuel today for the future? As this article is written, fuel prices are near a five year low. Could they get lower? Sure. Could fuel prices get higher? Bet on it. I am sure that you have heard the stories of how Southwest Airlines has done a terrific job with their fuel hedging program. They have a good fuel management program. It is a large part of what makes them profitable year in an year out. They take a large variable (fuel cost) off of the table when they manage their fuel cost by hedging. You still want to buy and manage your fuel program the best you can and hopefully with the Sokolis (click here for more information), but here is what a hedge might look like.

Your company budgets $3.75 a gallon for fuel. You don’t know, like any of the rest of us, if the price will go up or down over the next 12 months. You are able to buy a hedge (financial instrument) at $2.90 for the whole year. This means you will not pay more than $2.90 per gallon. There are several different tools that can be used to work around this, but basically your buying an insurance policy to protect your company from an accident. The accident being the price of fuel skyrocketing back the $4.75 a gallon. That would blow your budget out of the water.