CASE 22012 Fuel Hedging at JetBlue Airways

Questions:

Helena Morales wants to backtest a WTI hedge vs a Brent hedge. She takes a monthly hedge position of 20 million gallons for 2012. This 240 million gallon of annual hedge position represents about a 45.7% hedge ratio assuming an annual consumption of 525 million gallons. Assume (unrealistically) that JetBlue would use a simple futures hedge (note: the WTI and Brent exchange-traded futures contracts are for 1,000 barrels = 42,000 gallons). Now use the 60 months of 2007-11 historical prices on jet fuel, WTI, and Brent to simulate what would have been the monthly jet fuel costs under 3 scenarios: (a) without a hedge; (b) with a WTI hedge; and (c) with a Brent hedge. Would any hedge have helped reduce fuel cost volatility?