By speculating on the future cost of jet fuel, some airlines have managed to save billions of dollars in potential fuel costs. It seems that airlines are now trying to have it both ways, by condemning the “bad” speculators (the commodity traders) and ignoring the “good” speculators (themselves).

Fuel hedging is a strategy that airlines employ in order to insulate themselves from an anticipated rise in the price of jet fuel. Most commonly, airlines trade oil futures contracts and use the profits derived from those trades in order to offset the high price of fuel. According to MSNBC, “hedging has been described as everything from gambling to buying insurance.” U.S. businesses have begun to more aggressively speculate in commodities markets through fuel hedging in hopes of protecting themselves from high oil prices. According to the Wall Street Journal:

And who are these “speculators” driving up prices? The futures market operator Intercontinental Exchange says that an increasing share of its customers are not financial houses but commercial firms that need to manage oil-price risks – refiners, airlines, and other major energy consumers. Another term for these “speculators” would be “American business.”

As a result of its aggressive fuel hedging strategy, Southwest Airlines has hedged 70 % of this year’s fuel needs at $51 per barrel instead of the current price of more than $140 per barrel. Since 1999, hedging has saved Southwest an estimated $3.5 billion. Unlike Southwest, other domestic carriers have been less aggressive at hedging and are paying higher jet fuel prices because of it. Delta hedged only 27% of its first-quarter fuel consumption, while United hedged 30%, and Continental hedged just 22%, leaving them particularly exposed to the higher prices of jet fuel. As a result, Southwest was paying $1.98 a gallon for jet fuel during the first quarter of this year, while United was pay $3.02 a gallon during the same period.

As a form of speculation, fuel hedging bears inherent and potentially severe risks for airlines that rely on it. According to Jon Najarian, co-founder of Optionsmonster.com, a derivatives strategy firm, “if oil goes down too fast you get caught locking in prices ridiculously high, and then you carry that on to the consumer for a considerable period of time.” In 2006, Delta reported a loss of $108 from fuel hedging, while in 2007 Continental reported a first quarter loss of $18 million from hedging.

According to the industry’s website, StopOilSpeculationNow.com, the airlines want to limit the size of trades conducted by “any trader not hedging with the intention of taking physical delivery of a related commodity.” In the word of ATA spokesperson David Castelveter, “our campaign is about stopping the speculation, the buyers of paper contracts — people who are not buying a drop of oil.”

The problem with this argument is that the airlines themselves are currently engaged in the buying and selling of “paper contracts” for jet fuel through their extensive fuel hedging programs. The industry argues that because the profits reaped from fuel hedging are eventually used to purchase jet fuel, they are not truly speculative and should not be restricted. According to Houston Chronicle columnist Loren Steffy, the airlines want us to believe that their “motives are somehow more pure than, say, a pension fund that uses trading profits to boost the retirement accounts of its members.”

Current legislation moving through CSongress and supported by the airline industry creates a huge loophole by defining “legitimate” speculation in such a way that allows the airlines to continue to reap the benefits of fuel hedging yet restricts the ability of other commodity traders to speculate on the price of oil. Such legislation would target the supposed bad speculators, such as pension funds and other institutional investors, and leaves the good speculators, such as the airlines, unencumbered by increased restrictions on commodity trading.

But, the public is now beginning to see through the Airline Oil Spin.

The public is beginning to ask questions like:

• Why does much of the proposed legislation limit some oil speculation, but allow the airlines themselves to continue speculating?
• Why has the airline industry continued to fly the equivalent of “Hummers”, while airlines in other parts of the world have shifted to more fuel efficient planes?
• Why, as documented in a recent report Shortchanged, has the airline industry received more than $8.5 billion in taxpayer assistance since 2001 while passenger service standards and job quality standards have fallen?
• With airlines showing disregard for passengers and their workers, why should Congress be doing them favors by exempting companies like airlines from limits on oil speculation?

The Airline Oil Spin is a resource where we can help one-another see through the airline industry’s attempt to distract from the array of problems faced by the traveling public.