Hedging: 101
Ok, Hedging 101...
Southwest Airlines has a two-man fuel hedging department that is equipped with the latest market-tracking software. The concept of "hedging fuel" is not as simple as some are making it sound. First off, you can't just buy Jet-A futures, as Jet-A futures aren't available. What Southwest does is buy Heating Oil (Kerosene) futures for their hedges. Ok, now let's say they bought these futures at $70 a barrel. When the market price hits, say $114 a barrel and the company decides to sell, that's a profit of $44 a barrell...hence the savings. Same effect if the hedges are bought at $114 a barrell and sold at say $160 a barrell. Keeping this in mind, the notion that hedges "run out" is not valid.
That's my understanding of the whole thing...I'm sure there are much more complicated mechanisms in play, but I have neither the time nor the inclination to write any more than I already have.