Corporate Hedging Programs: How Airlines, Utilities, Miners and Food Producers Hedge, and When It Hurt

A corporate hedging program is a standing policy under which a company that buys or sells a commodity, such as jet fuel, natural gas, gold or cocoa, uses futures, swaps and options to fix or cap part of its future price. The goal is not to profit from the market but to make costs or revenues more predictable, so that a price spike does not force the company to cut investment, raise emergency capital or break debt covenants.

In short: a hedge program trades upside for certainty. When prices rise, a fuel buyer’s hedges pay out and offset higher costs; when prices fall, the same hedges lose money or cost a premium, and the company pays more than its unhedged competitors. Public filings show both sides: Southwest Airlines’ hedges cut its 2007 fuel bill by $686 million, then left it with a $992 million derivative liability after oil collapsed in late 2008, and in 2025 it shut the program down. The academic evidence suggests hedging can add value, mainly for firms whose investment plans are hurt when prices move against them.

This article explains how professional treasury teams design these programs and what company disclosures show about results. It is mechanics and history, not advice.

A common misconception: “a good hedge saves money”

A hedge is judged by whether it reduced the risk it was meant to reduce, not by whether it made a profit. Over time, a fairly priced hedge should roughly break even before costs, and options cost a premium every year whether or not they pay. A company that only judges its program by annual gains will be tempted to hedge more after prices rise and abandon it after prices fall, which is close to the opposite of risk management. Southwest’s own 2025 filings, quoted below, describe the end of its program in exactly these cost terms.

The basic mechanics of long and short hedges are in how hedging with futures works, and simple farmer and airline examples are in how farmers and airlines hedge. Here we look at how companies actually run programs, and what the record shows. (For where corporate hedgers sit among market participants, see who trades futures.)

Why companies hedge: theory and evidence

The underinvestment argument

The best-supported reason for corporate hedging is that it protects investment. If a company relies on internal cash flow to fund investment, and external capital is expensive, a price shock that drains cash forces it to cut good projects. Hedging smooths cash flow so planned investment can go ahead. This framework comes from Froot, Scharfstein and Stein (1993) and is the one used in the airline study below.

What the studies found

Airlines. David Carter, Daniel Rogers and Betty Simkins, “Does Hedging Affect Firm Value? Evidence from the US Airline Industry,” Financial Management 35(1), 2006, pages 53-86, studied jet fuel hedging by US airlines from 1992 to 2003. They found that “jet fuel hedging is positively related to airline firm value,” with a hedging premium above the 5% earlier reported for currency hedgers and possibly as high as 10%. Most of the premium came from the interaction of hedging with capital investment, which they read as evidence that “the principal benefit of jet fuel hedging by airlines comes from reduction of underinvestment costs.” Airlines fit the theory well: the authors argue that airlines’ investment opportunities tend to be best when fuel is expensive, which is exactly when unhedged cash flow is weakest, so a hedged airline can keep investing when others cannot.
Oil and gas producers. Yanbo Jin and Philippe Jorion, “Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers,” Journal of Finance 61(2), 2006, pages 893-919, studied 119 US producers from 1998 to 2001. Hedging reduced the sensitivity of their stock prices to oil and gas prices, but they found no significant difference in firm value between hedgers and non-hedgers. One interpretation is that investors in a producer want commodity exposure and can easily see and adjust it themselves.

The two results are not contradictory. Hedging seems to add value where commodity moves hurt the firm’s ability to invest (airlines buying fuel), and less where investors hold the stock precisely for the commodity exposure (producers selling oil, or, as the Barrick case below shows, gold).

How a hedge program is built

The policy

Programs start with a board-approved policy that sets how much may be hedged, how far out, with which instruments, and who may approve trades. Air Canada’s 2024 Management’s Discussion and Analysis is a clean example. Its policy “permits hedging of up to 75% of the projected jet fuel purchases for the current calendar year, 50% of the projected jet fuel purchases for the next calendar year, and 25% of projected jet fuel purchases for any calendar year thereafter,” and it notes these “are maximum (but not mandated) limits.” Hedge ratios that decline with time reflect growing uncertainty about future volumes: hedging fuel for flights that are later cancelled turns a hedge into a speculative position.

The instruments

Swaps or futures fix a price. They protect fully against rises and give up all the benefit of falls.
Call options cap a price for an upfront premium and keep the benefit of falls.
Collars buy a call and sell a put, capping the price in exchange for a floor, often at little or no net premium.

The proxy problem

Jet fuel futures are thin, so airlines often hedge with crude oil or heating oil (NYMEX ULSD) contracts and accept basis risk between the hedge and the fuel they actually burn. Southwest’s 10-K for 2007 describes adding “refinery margins on most of those positions,” in other words hedging the spread between crude and refined products as well. (Basis is defined in the basis glossary entry.)

The accounting

Hedge accounting decides whether gains and losses hit earnings when they occur or when the hedged purchase happens. Many companies report hedge results outside their segment profits so managers are judged on operations. Hershey, for example, reports “unallocated mark-to-market gains and losses on commodity derivatives” at the corporate level. The rules are explained in hedge accounting explained.

Worked example: an airline in rising and falling markets

A hypothetical airline burns 1 billion gallons of jet fuel a year. It hedges 50% of next year’s fuel. Option A is a swap at $2.50 a gallon. Option B is a call option with a $2.60 strike costing $0.10 a gallon in premium. All prices are illustrative.

Jet fuel price next year	Unhedged fuel bill	With 50% swap	With 50% calls	Swap result	Call result
$3.50 (spike)	$3.500 billion	$3.000 billion	$3.100 billion	+$500 million	+$400 million
$2.50 (flat)	$2.500 billion	$2.500 billion	$2.550 billion	$0	-$50 million
$1.80 (collapse)	$1.800 billion	$2.150 billion	$1.850 billion	-$350 million	-$50 million

Per gallon, the swap-hedged airline pays $3.00, $2.50 and $2.15 across the three scenarios; the call-hedged airline pays $3.10, $2.55 and $1.85. The swap gives more protection in a spike and does the most damage in a collapse. The call costs $50 million in a calm year and never loses more than that.

The collapse row matters beyond the income statement. If prices fall to $1.80 with a year still to run, the swap book is a $350 million liability, and swap counterparties typically require collateral against it. The airline is now paying cash out on its hedges at the same time competitors enjoy cheap fuel and cut fares.

Adding basis risk

Now suppose the airline hedges with NYMEX heating oil (ULSD) futures instead of jet swaps. Each contract covers 42,000 gallons, so 500 million gallons is about 11,905 contracts. At inception heating oil is $2.30 and jet fuel trades $0.20 above it, so the intended locked price is $2.50.

Outcome	Jet fuel	Futures P&L	Effective price on the hedged half
Heating oil rises to $3.20 and the jet premium widens to $0.45	$3.65	+$450 million	$2.75
Heating oil falls to $1.60 and the jet premium narrows to $0.15	$1.75	-$350 million	$2.45

In the spike, the hedge pays $450 million but the airline still pays $2.75 rather than $2.50, because the jet premium widened by 25 cents. That 25 cents on 500 million gallons is $125 million of basis loss that no futures position on heating oil could have prevented.

Case studies from company filings

Southwest Airlines: the program that defined the strategy, and its end

Southwest’s 10-K filings trace the full cycle.

Fiscal 2007. Southwest “had instruments in place to protect against over 90 percent of its fuel consumption needs at an average crude oil equivalent price of $50 per barrel,” which “resulted in a $686 million reduction to Fuel and oil expense during 2007.” Going into 2008 it had protection for over 70% of expected consumption at about $51 a barrel, over 55% of 2009, and smaller amounts out to 2012.
Fiscal 2008. Crude rose from about $100 to over $145 a barrel in July 2008. Southwest’s 10-K says its hedges contributed “to cash savings of almost $1.3 billion during 2008.” Then prices collapsed. In the fourth quarter Southwest cut its net hedge for 2009 through 2013 to about 10% of expected consumption, “primarily by selling swap instruments,” and at December 31, 2008 its remaining derivative contracts showed a net liability of about $992 million. It estimated its fuel cost per gallon would exceed market prices by about $0.16 to $0.17 in each year from 2009 to 2011 as a result.
Fiscal 2023 and 2024. By then the program was costly insurance. Southwest’s 2024 10-K reports hedging premium expense of $121 million in 2023 and $157 million in 2024, against cash settlement gains of $267 million and $53 million. The net was +$146 million in 2023 and -$104 million in 2024. The same filing says Southwest expected to burn about 2.2 billion gallons in 2025, so each cent per gallon was worth about $22 million, and that it did “not intend to add new hedging positions to its current hedge book.”
Fiscal 2025. Southwest’s 10-Q for the quarter ended June 30, 2025 states that it “discontinued its fuel hedging program in 2025,” and that during the second quarter it terminated its remaining hedges, which had been scheduled to settle through 2027, for cash proceeds of about $40 million. Because of hedge accounting, about $209 million related to the closed positions remained in accumulated other comprehensive income at June 30, 2025, to be recognised as fuel expense in later periods as the originally hedged purchases occur.

The 2008 episode is the textbook risk of a large swap book: it protected the company in the spike, then turned into a liability when the market reversed. The 2025 decision shows the other side: after years in which premiums exceeded payouts, the company judged the insurance not worth the cost. Neither outcome tells you whether hedging was right; they show what it does.

Air Canada: small, flexible hedges

Air Canada’s 2024 MD&A shows a light-touch program within its policy limits. In 2024 it used jet fuel swaps covering part of that year’s fuel, which settled with a C$54 million loss recorded in aircraft fuel expense; in 2023 it bought call options for a C$44 million premium and recorded a net gain of C$51 million. It had no fuel derivatives outstanding at the end of either year. Against 2024 aircraft fuel expense of C$5,118 million, the 2024 hedging loss was about 1% of the fuel bill, a reminder that a small program has a small effect in either direction.

Atmos Energy: a utility, where regulation does most of the hedging

A regulated gas utility faces a different problem. Atmos Energy’s 10-K for the fiscal year ended September 30, 2021 explains that purchased gas cost adjustment mechanisms “provide a dollar-for-dollar offset to increases or decreases in the cost of natural gas,” so its operating income is generally not affected by gas prices. It still uses “a combination of physical storage, fixed physical contracts and fixed financial contracts to reduce our exposure to unusually large winter-period gas price increases,” mainly to protect customers.

Winter Storm Uri in February 2021 tested that structure. Atmos recorded a $2.1 billion regulatory asset for the extraordinary gas costs ($2,011.7 million in Texas and $89.0 million in Kansas) and issued $2.2 billion of incremental financing to pay for them. For a utility, the extreme case is less a profit problem than a cash and financing one, which is why storage and fixed-price supply matter as much as derivatives.

Barrick Gold: when shareholders did not want the hedge

Gold miners sell the commodity, so their natural hedge is a short. Barrick’s September 8, 2009 announcement, filed with the SEC, explained why it was getting out. Its “Gold Hedges” were 3.0 million ounces of fixed-price contracts with a mark-to-market of negative $1.9 billion at a gold price of $993 an ounce, within total gold sales contracts of 9.5 million ounces at negative $5.6 billion. A $10 per ounce change in gold moved the value of the Gold Hedges by $30 million (3.0 million x $10). Barrick launched a $3 billion share offering, intending to use $1.9 billion of the proceeds to eliminate the Gold Hedges, and said the hedges and related contracts “were adversely impacting the Company’s appeal to the broader investment community.”

This is the Jin and Jorion result in practice: investors who buy a gold miner want gold exposure, and a hedge book that removes it can lower the share price even if it smooths earnings.

Hershey: hedging delays a price shock rather than preventing it

Hershey’s 10-K for 2024 says it uses futures and forward purchases to cover “future manufacturing requirements generally for 3 to 24 months,” and that cocoa prices rose about 130% during 2024. Its cost of sales benefited from an incremental $563.0 million of favourable mark-to-market on commodity derivatives intended to hedge future years’ purchases, and it reported $460.4 million of unallocated mark-to-market gains on commodity derivatives at the corporate level, against total segment income of $3,256.6 million.

The gains are real, but so is the timing. A 3- to 24-month hedge horizon means a sustained rise in cocoa reaches costs later, not never. Hedging buys a company time to adjust prices, recipes and sourcing; it cannot hold input costs below the market indefinitely.

When hedging hurt

Falling after rising. Southwest’s swap-heavy book turned into a $992 million liability in late 2008. Large fixed-price books protect against one direction and cost money in the other.
Premiums that never pay. Southwest’s 2024 premiums of $157 million against $53 million of gains are the steady-state cost of option-based protection in a calm or falling market.
Hedging what investors wanted to own. Barrick’s negative $5.6 billion of gold sales contracts weighed on its valuation until it closed them out.
Hedge horizon mismatch. The most famous corporate example is Metallgesellschaft’s early-1990s oil marketing unit, which hedged long-term fixed-price supply contracts with short-dated futures and suffered funding losses when the market moved, covered in famous futures blowups.
Basis. Proxy hedges leave the spread between the hedge and the real input open, as the heating oil example showed.

What a professional program gets right

A written policy with maximums, approved by the board, as in Air Canada’s 75/50/25 limits.
Hedge ratios tied to forecast volumes, so the company does not hedge purchases it may not make.
A liquidity plan for collateral and margin when hedges move against the company.
Measurement against the objective, such as cash flow or earnings volatility, not against hindsight profit.
Clear communication with investors, so shareholders know what exposure they own.

The short version

Corporate hedging programs use futures, swaps and options to make commodity costs or revenues more predictable, within board-set limits such as Air Canada’s 75%, 50% and 25% caps by year. In our airline example, a 50% swap hedge cut the fuel bill from $3.5 billion to $3.0 billion in a spike but raised it from $1.8 billion to $2.15 billion in a collapse, and a proxy hedge left $125 million of basis loss uncovered. Southwest’s filings show the full cycle: a $686 million benefit in 2007, almost $1.3 billion of savings in 2008, a $992 million liability at the end of 2008, net hedging costs in 2024, and the end of the program in 2025. Barrick and Hershey show that the right answer depends on what investors want to own and how long the company needs to adjust. Carter, Rogers and Simkins (2006) found a value premium for airline hedgers; Jin and Jorion (2006) found none for oil and gas producers.