[elemeno]

> Yet, in all cases, after hedging, the airline will still either win or lose depending upon the change in oil price. No certainty has been gained.

That’s not really true. You’re locking in the price that you’re going to pay - that’s the certainty. You might however not be getting the best price at that point in time. From a financial forecasting perspective it probably worthwhile trade off though as you’re fixing one of your costs for that time period and that’s useful even when sub optimal.

[joosters]

There's still no certainty. For an airline, your prices have to be competitive. If you've locked in an oil price, and it turns out to be a high one, then your fares will be more expensive than your competitors (assuming that they didn't hedge in the same way). So the only certainty there is failure.

In all situations, hedging and non hedging, the oil price will determine whether you win or lose. There is no magical combination of derivatives that will ensure success. In fact, for every financial product you buy, you're paying a cost due to the margin that the bank/market charged you.

Hedging might make sense for some accounting/tax situations, but that's another issue entirely.

[fennecfoxen]

"If you've locked in an oil price, and it turns out to be a high one, then your fares will be more expensive than your competitors."

No. Your fares will remain competitive. It's just a hit to your profits.

[joosters]

You are free to lose money by keeping the prices competitive, or lose money by raising your prices and losing business. Either way, it's the same result.

[1998v2]

Airlines sell tickets in advance, so hedging will allow them to match their near-future fuel prices to the ticket prices they're selling now. They consume fuel but don't produce it, so I don't think they can fully balance things out over time internally.

edit: I see this was mentioned already in the thread.

[pathseeker]

> There's still no certainty. For an airline, your prices have to be competitive. If you've locked in an oil price, and it turns out to be a high one, then your fares will be more expensive than your competitors (assuming that they didn't hedge in the same way). So the only certainty there is failure.

A huge chunk of airline tickets are sold in advance. The oil futures can literally lock in the prices for only sold airfare if you're that paranoid.

Also (probably more important), the cost of oil on a given ticket is quite low and it would take a drastic change in oil prices for it to be obvious to customers comparison shopping.