I'm not current and have never been very adept at the oil markets, but I'll try to answer your questions.
In short, hedging is like buying insurance (auto, medical, homeowners) against the potential damage of higher jet fuel costs to airlines. There is a cost to hedging so it's a losing bet in the long run. I'll illustrate with real world data in my next post; this one will be long enough.
There are a number of different futures contracts that airlines have used to hedge their fuel costs - oil futures, heating oil futures, and several other energy contracts. They use stuff like triple collars to protect themselves on the downside and upside - I kind of understand that stuff a little bit but I couldn't put my limited knowledge to paper and have it make sense.
One of the biggest markets for energy futures is the CBOE (Chicago Board of Exchange). You can trade futures electronically 24hrsx5days/wk.
Energy Products
How long can one hedge energy futures? Let's go with crude oil (symbol CL) futures. You can currently trade as far out as Dec 2024 but a contract that far in the future is very thinly traded (near zero volume) so the bid/ask spread is going to be wide - if one buys a few contracts that far out, they'll pay a premium over the contract's intrinsic value. And you couldn't hedge in enough volume that far out to move the needle for a company as large as United.
One thing that must be considered is the effect of the push by global warming alarmists to alternative forms of energy will have on demand for oil. Replacing just 10% of worldwide oil consumption with alternative energy sources will decrease demand for oil by ~9.5 million barrels per
day. To put that in perspective, the fall in oil prices is due to an excess supply of oil by 1-3 million barrels per day.
There's been speculation that Saudi Arabia has flooded the markets in order to kill fracking in the US and Canada. The problem with that theory is that frackers (like the airlines post-911) have slashed costs by lowering wages, renegotiating drilling rig rental fees, technological advances (they've actually made a lot of progress here in the last couple of years), and just cutting costs everywhere possible.
I think that Saudi Arabia is flooding the oil markets in order to slow down alternative energy advances and deployment of the technology. Alternative energy is a much bigger threat in the long run to the price of oil.
So rather than curse AGW alarmists, I am now cheering for them, as they are driving down the price of oil. And as an airline pilot, lower oil costs indirectly means a few more dollars in our pockets.
Ending this post. Next post is real world numbers for hedging.
Edit: Sorry about the sad face in the header; I accidentally selected it while typing this rambling post.