Question
Southwest Airlines (NYSE: LUV), incorporated in 1967, has been one of the most profitable and best-performing airlines in the United States for decades. Southwest has
"Southwest Airlines (NYSE: LUV), incorporated in 1967, has been one of the most profitable and best-performing airlines in the United States for decades. Southwest has maintained a consistent Investment Grade credit rating from all three ratings agencies, which is rare among airlines. It has been the only airline to consistently return capital to its investors year after year, and in 2018 recorded its 46th consecutive year of profitability.
Southwests fuel hedging started slowly it was outsourced and relatively simple, trading contracts representing just 20 percent to 30 percent of the airlines fuel needs up to six months in advance. That changed in 1998, as Asian economies melted down and OPEC crashed crude oil prices to $12/barrel. It was at that point that Southwest executives got serious about locking in these extremely low prices and hedging a greater percentage of its overall fuel spend. Over the next five years, Southwest was paying anywhere from 25 percent to 40 percent less for its jet fuel than its competitors, and by 2008, the airline was hedging 70 percent of its fuel needs." - Source: freightwaves.com Explain how Southwest's hedging strategy worked in reducing Southwest's exposure to oil prices. Explain what type of contracts they likely used to hedge and what position they took in these contracts. Do you have any suggestions to Southwest for improving its hedging program?
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