US Airways Group, Inc. (LCC), AMR Corporation (AAMRQ): Why Do Airlines Hedge Fuel Costs?

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Over the past several years, US Airways Group, Inc. (NYSE:LCC) has shown quite convincingly that the costs of fuel hedging outweigh the benefits. Even in a rising fuel price environment — when hedging should offer the most benefits — US Airways has still paid less than competitors for fuel, on average. So why do most of US Airways’ competitors continue to hedge?

The real reason is most likely that executives want to increase the predictability of earnings. By hedging, airlines restrain their profit growth when fuel prices drop while mitigating the drag of fuel price increases. Airline executives look better to shareholders in the short-run if they can make earnings relatively predictable.

However, hedging costs are significant over time. For long-term investors, having a higher long-term earnings stream should be more important than artificially keeping earnings steady from year to year, as long as a company can maintain comfortable liquidity throughout the business cycle. (Major airlines tend to hold billions of dollars in cash, so this shouldn’t be a major issue.) Unfortunately, only US Airways Group, Inc. (NYSE:LCC) is really looking out for long-term investors’ interests when it comes to fuel hedging.

The article Why Do Airlines Hedge Fuel Costs? originally appeared on Fool.com.

Adam Levine-Weinberg is short shares of United Continental Holdings (NYSE:UAL) and is long September 2013 $33 puts on United Continental Holdings. The Motley Fool recommends Southwest Airlines.

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