Southwest Airlines Simulates Fuel Market Movements in Hedging Strategy
Simulate different fuel-hedging scenarios based on market data quickly
Use MATLAB, Database Toolbox, and Financial Toolbox to pull fuel market data and simulate different hedging scenarios
- Strategic insight enhanced
- Process efficiencies increased
- Learning simplified
Jet fuel is the second biggest expense for Southwest Airlines, accounting for nearly 25% of its annual operational costs in 2021. To protect its business and customers from catastrophic price increases and mitigate price volatility, the airline utilizes a fuel-hedging portfolio consisting of trade options.
For insight into their hedging strategies, Southwest Airlines analysts and MathWorks consultants worked together to create an application that automates analysis of their fuel-hedging positions. Developed in MATLAB®, the app simulates different trading scenarios and produces summary reports designed to be used by the airline’s CEO, CFO, and the SVP Finance and Treasurer to help inform hedging decisions.
“MathWorks Consulting helped us to turn what was previously an all-day process into a simulation that runs in a matter of minutes,” says Luke Moran, Fuel and Risk Management Senior Analyst at Southwest Airlines. “With the fuel-hedging analysis tool we developed in MATLAB, my team can simulate and present several trade options to executive management on the fly.”
Analysts at Southwest Airlines had been doing all the fuel-hedging computations and projections in Excel®, manually entering fuel price data and calculating the results of different hedging strategies. They would then transfer all this data and analysis to a slide deck for presentation at weekly executive strategy meetings, a process that took almost a full day to complete.
Being able to automate and quickly update the analysis based on the latest market prices would enable more timely hedging decisions.
The airline’s analysts worked with MathWorks consultants to build and deploy a custom app that is designed to automate financial analysis and projections for the airline’s fuel price–hedging positions.
They used Database Toolbox™ to import fuel market data from their database into MATLAB. With App Designer, they created a user interface where analysts can see the fuel data and configure different scenarios to simulate. They used Financial Toolbox™ to model price movements in the oil market and simulate the outcomes of hedging strategies.
They then wrote a custom program in MATLAB to automatically convert the analysis into the PowerPoint® presentations used in company meetings to make hedging decisions. Another MATLAB script generates an Excel spreadsheet that includes the different steps of the analysis, which the analysts use for auditing purposes.
Finally, the entire toolset was compiled into a standalone application with MATLAB Compiler™. This is designed to enable Southwest Airlines employees to run the application without having to know or install MATLAB.
Used in executive strategy meetings, the fuel-hedging application is designed to help answer questions in minutes instead of hours due to the constructed scenarios and hypothetical trades.
- Strategic insight enhanced. “The MATLAB app is designed so that we can quickly analyze the effects of market conditions and ‘what-if’ scenarios on our fuel-hedging portfolio and deliver a whole menu of different trade ideas to executives in a couple of hours,” says Moran.
- Process efficiencies increased. “Our hedging tool is designed so that we’re able to respond faster to market changes,” says Moran.
- Learning simplified. “Unlike the learning curve in Excel, my team was able to start using the MATLAB app right away, even though they don’t use it as often as I do,” says Moran.