[NVDave]

Their storage is at airfields in their network. They sometimes pay airports to upgrade their fuel storage facilities.

There isn’t a perfect one-for-one contract to hedge JetA, so there are more complicated correlated futures being used to hedge JetA. Regardless of this lack of exact contract, FASB as well as the CFTC, consider what LUV is doing as “hedging” because they do take delivery on a product - JetA.

Now, as to “where do they take delivery?” Well, a hedger can take delivery at approved delivery terminals. Since JetA is fungible, if you’re a commodity hedger and you want to take delivery of JetA at an approved terminal somewhere clear across the country, you simply call your fuel broker (usually a major company) and say that you have XXX barrels of product YYY appearing at the delivery terminal. Your fuel distributor can then arrange a credit into your account or similar accounting disposition for the fuel you had delivered to your fuel distributor’s tank or pipeline head.

The important thing to know about hedgers is this: they’re either “long” a commodity (usually in the case of a commodity producer) and hoping the price goes up. Or they’re consumers of a commodity and want the price (ideally) to go down, but at the very least be protected against price increases. Either way, the hedger is producing or consuming the commodity in question.

A speculator produces no product and takes delivery of no product - they buy or sell futures contracts without any underlying commodity in their possession and they settle the contract for cash.

At all ends, this is a very interesting paper detailing some of Southwest’s hedging srtategies:

http://www.kellogg.northwestern.edu/research/fimrc/papers/jet_fuel.pdf

[palmer]

Well one thing you have wrong is that producers don't hedge long, they hedge with puts or foward-sell in case the price drops. If the price goes up they are out on the contract, but their commodity in the ground is worth more. If the price drops they are good on the contract. If a commodity producer wants to forward-sell, but they aren't enough SW Airs to buy the fuel, who are are they going to sell to?

Conversely if there is an anticipated shortage (e.g. from Mideast unrest) and the airline wants to buy fuel futures and producers won't sell theirs at that time, who are they going to buy from? The "speculators" are the answer in both cases, they are simply middlemen, they can make wrong or right bets (and a lot of them are long and wrong right now).