The case puts you in the shoes of a research analyst who is examining the jet fuel hedging strategy of JetBlue Airways for the coming year 2012. Airlines cross-hedge their jet fuel price risk using derivatives contracts on other oil products such as WTI and Brent crude oil. Consequently, an airline is exposed to basis risk. In 2011, dislocations in the oil market led to a Brent-WTI premium wherein jet fuel started to move with Brent instead of WTI, as it traditionally did. Several U.S. airlines started to change their hedging strategies, moving away from WTI. Entering 2012, should JetBlue also switch its hedging instruments toward Brent. The hedging strategy is for 20 million gallons per month. Each WTI and Brent futures contract size equals 42,000 gallons (1,000 barrels).

Q3. How do airlines hedge their jet fuel price risk? Briefly discuss. Can also refer to Figure 3.

Figure 3: Hedge with Brent Futures - Profit and loss past five years